Method widely used by professional stock market, fundamental analysis aims to assess the value of a financial security by taking into account the underlying elements that influence the present and future activities of a company .
Fundamental analysis is not only used for business, it can also be applied to an industry or the economy of a country or region. The idea of this method is to analyze the "economic health" of an organization without reducing it to the fluctuating values. It seeks to determine if the organism is economically viable.
The quality indicator of analysis and amount
To better understand what fundamental analysis, be aware that it can take into account all the elements related, directly or indirectly, with the economic health of a society. This may include, for example the results and benefits of the latter, as the market share it represents or the quality of its management.
These factors are generally grouped into two categories.
- Quantitative factors, that is to say, those that are measurable by figures
- The quality factors, that is to say, those that are measurable by the quality.
As part of the stock markets, quantitative fundamentals are the peculiarities of the company that can be measured and quantified. These measurements can be made on the basis of financial condition.These allow to value assets, profits and results with great accuracy. May, for example, be taken into account in the analysis, the rate of growth or a country's economic health.
The qualitative fundamentals, meanwhile, are intangible factors of society, such as the quality of its governance, the influence of the brand, etc. It can also be the political situation of a country or area.Fundamental analysis joins the two indicators, both quantitative and qualitative.
For example, if it is an analysis of the action X, the analyst will consider the dividend, earnings per share and the Price / Earnings Ratio. But that analysis is complete, the financial analyst will also examine the flagship of the company and its mode of governance. The fact that the company knows the beginnings of a social crisis may have important consequences on the value of its shares.
Set the intrinsic value
One of the assumptions of fundamental analysis is that the price of a share on the stock exchange is not its real value . Financial analysts call this hidden value, intrinsic value.
The idea is as follows. A share is traded at a price of 30 Euros. After work, the financial analysis can define it is actually worth 37 Euros. This is its intrinsic value. It is interesting for the analyst to determine the intrinsic value of a share since then knows she's its real value. And it is always financially more attractive to buy shares traded at a discount to its intrinsic value. The idea being that in the long term, the action will trade on the stock market to its intrinsic value. But the opposite case can also be true.
Practical in the long term
You should know that fundamental analysis is a method that requires a very long experience. It is possible to predict the market trend only after a demanding practice. Based on subjectivity and interpretation of socio-economic, fundamental analysis does not address any particular rule. Only experience and in-depth study of economic phenomena over a long period enable the development of trends.