Introduction to Fundamental Analysis

Submitted by Sharemarket News on 13 May, 2011 - 18:27

Everything about fundamental analysis.

You know you are wading into stock market deep waters when you wish to know what fundamental analysis means. Perhaps your goal in life is to become a hotshot stock analyst, or maybe you just want a basic understanding of securities. In the simplest terms, fundamental analysis is the study of factors that affect a company's earnings.

Since factors as disparate as political unrest on one end of the spectrum and quality of management on the other affect how a company performs, the scope of fundamental analysis is broad. As implied, fundamentals involves studying macroeconomics as opposed to price movements alone.

Say newbie trader X wants to invest in gold mining company Miners R Us (MRU). If he is worth his salt (and sane), X would perform fundamental analysis and ask the following questions before touching his capital: Is MRU revenue growing? Is MRU making a profit? Are debts being repaid? Does MRU's position today allow it to leave its competitors in the dust tomorrow? Is MRU up front when disclosing its financial situation?

In short, fundamental analysis allows Trader X to see what caused the highs and lows of stock movements (civil war in gold mining town, CEO thrown in prison for cooking the books, etc.) and jump in the right direction.

What does a fundamental analyst do? Fundamental analysts focus on political and economic events to predict company prospects. Timing is important, and simply knowing the details of news reports and releases is irrelevant if you don't know when the news is released. Knowing the correct time allows you to quickly jump where the market tells you to jump.