Fundamental analysis is the process of examining the underlying forces that affect the health of the economy, industry groups, and companies. It has the same nature as other financial analysis, it pretends to forecast future price movements. It feels like it has to do with the economy as an entire unit but at the company level, fundamental analysis involves the examination of financial data, management, business concept, and competition. At the industry level, it might be an examination of supply and demand forces for the products offered.
In order to forecast future stock prices, fundamental analysis has to combine economic, industry and company analysis to conclude a stock’s current value and forecast future value. If fair value is not equal to the current stock price, fundamental analysts believe that the stock is either overvalued or undervalued and the market price will ultimately gravitate towards fair value.
Technical analysts consider the market to be 80% psychological and 20% logical. Fundamental analysts consider the market to be 20% psychological and 80% logical. Psychological or logical may be open for debate, but there is no questioning the current price of a security.
Fundamental analysis can be valuable, but it should be approached with caution. If you are reading research written by a sell-side analyst, it is important to be familiar with the analyst behind the report. We all have personal biases, and every analyst has some sort of bias. The fundamental analysis is based on an in-depth and all-around study of the underlying forces of the economy, providing data that can be used to predict future prices and market developments. Fundamental analysis consists on: the analysis of the economy as one unit, the analysis of a particular industry or that of an individual company.
1. Your fellow traders
Mainly those who are less knowledgeable, less experienced, or simply too slow on the draw. Here you can profit by applying better trading skills and a better trading system.
Initial public offerings give you the chance to profit by the difference between the price of the stocks being public for the first time and the prices at which they will eventually settle. As a trader, your earnings will be well-deserved compensation for the risk you take on.
3. Moves of big companies
Big companies moves big in the financial markets, and play a role as portfolio builders for investors and traders. In this case, a trader’s profit will act as compensation for the risks taken.
Supply and Demand
What causes changes in the price of commodities, stocks, bonds, and currencies can be attributed to Supply and Demand. The theory of supply and demand is the most fundamental economic principle that drives prices and explains consumer behaviors.
In times of weather disaster, war, crisis investors would usually focus a safe- haven currency, which has traditionally been the US Dollar. In recent times, it has lost its safe-haven status and has been replaced by Gold and the Swiss Franc.
Market Expectations - "Buy the rumour, sell the fact"
It is concluded that prices tend to move primarily on expectations of certain events, economic data and political news instead of current data or news being released.
Economic ups and downs are considered to be the main reasons for determining exchange rates in the financial markets. Economists take data from several providers and compare them with economic reports published by governments on a weekly or monthly basis. This data is after that analyzed, and traders base their trading moves on the forecasts derived from the economic data.