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Fundamental analysis

Fundamental analysis

What is fundamental analysis?

Fundamental analysis (FA) is a method of measuring the intrinsic value of a security by examining related economic and financial factors. Fundamental analysts look at anything that can affect the value of a security. They study from macroeconomic factors such as the state of the economy and industry conditions to microeconomic factors such as the effectiveness of company management.

The ultimate goal is to arrive at a number that the investor can compare to the current price of the security. To see if the value of securities is less than its value or more.


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This method of stock analysis is considered the opposite of technical analysis. which predicts price direction by analyzing previous market data such as price and volume. Read here: What is technical analysis?

Key points of fundamental  analysis

Fundamental analysis is a method of determining the true or “fair market” value of a stock.

Fundamental analysts look for stocks. which are currently traded at a price higher or lower than their true value.

If the fair market value is greater than the market price, the stock is considered undervalued and a buy recommendation is given.

In contrast, technical analysts ignore the basics and study the historical trend of stock prices.

Fundamental analysis vs technical analysis

Understanding fundamental analysis

All equity analysis attempts to determine whether a security is valued in the broader market. Fundamental analysis is usually performed from a macro to micro perspective to identify securities that are underpriced in the market.

Analysts typically study the overall state of the economy and then the strength of a specific industry, in order, before focusing on the performance of individual companies to arrive at a fair market value for a stock.

Fundamental analysis uses public data to evaluate the value of stocks or any other type of security. For example, an investor can perform fundamental analysis on the value of bonds by examining economic factors such as interest rates and the general state of the economy.

Studying information about the bond issuer, such as possible changes in its credit rating.

For stocks, fundamental analysis of earnings, revenue, future growth, return on equity, profit margin and other data to determine the company’s value and potential for future growth; All these data are available in the financial statements of the company.

Fundamental analysis is often used for stocks. But it is useful for evaluating any security, from bonds to derivatives. If you consider the fundamentals, from the broader economy to the details of the company, you are doing fundamental analysis. Read here: What are encrypted tokens?

Investment and fundamental analysis

An analyst works to create a model to determine the estimated value of a company’s stock price based on publicly available data. This value is only an estimate, the analyst compares the company’s stock value compared to the current market price.

Some analysts may quote their estimated price as the intrinsic value of the company.

If an analyst calculates That the value of the stock should be significantly higher than the current market price of the stock may issue a buy rating or an overweight stock. This serves as a recommendation to investors who follow that analyst. If the analyst calculates an intrinsic value lower than the current market price, the stock is considered overvalued and a sell or underweight recommendation is issued.

Investors who follow these recommendations expect to be able to buy stocks with favorable recommendations, because such stocks should have a higher probability of appreciation over time. Likewise, stocks with an unfavorable rating are expected to be more likely to fall in price. Such stocks are candidates for removal from existing portfolios or additions as “short” positions.

This method of stock analysis is considered the opposite of technical analysis, which predicts the direction of prices by analyzing previous market data such as price and volume.

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Quantitative and qualitative fundamental analysis

The problem with defining the word fundamental is that it can cover anything related to the economic well-being of a company. They obviously include numbers like revenue and profit. But they can include anything from a company’s market share to the quality of its management.

Various basic factors can be classified into two categories: quantitative and qualitative. The financial meaning of these terms does not differ much from their standard definitions. Here is how the terms are defined in the dictionary:

Quantitative – “Relating to information that can be expressed in numbers and quantities.”

Qualitative – “Relating to the nature or standard of something, not its quantity.”

In this context, quantitative fundamentals are hard numbers. They are the measurable characteristics of a business. That’s why the biggest source of quantitative data is financial statements. Income, profits, assets and more can be measured with great precision.

Qualitative foundations are less tangible. They may include the quality of a company’s key executives, its brand recognition, patents, and proprietary technology.

Neither qualitative nor quantitative analysis is inherently better. Many analysts consider them together.

Qualitative basics to consider

There are four basic principles that analysts always consider about a company. All of them are more qualitative than quantitative. They include:

Business model: What exactly does the company do? This is not as simple as it seems. If a company’s business model is based on selling fast food chicken, is that how it earns its revenue? Or does it only use royalties?

Competitive Advantage: A company’s long-term success is largely due to its ability to maintain and sustain a competitive advantage. Powerful competitive advantages, such as the Coca-Cola brand and Microsoft’s dominance of the PC operating system, create a loophole around a business that allows it to keep competitors at bay and enjoy growth and profits. When a company can achieve a competitive advantage, its shareholders can be well rewarded for decades. Read here: What is cryptocurrency?

Management: Some believe that management is the most important criterion for investing in a company. It makes sense: Even the best business model is doomed if company leaders can’t get the plan right. While it is difficult for retail investors to actually meet and evaluate executives, you can visit the company’s website and review the resumes of top executives and board members. How well did they perform in previous jobs? Have they unloaded a lot of stock recently?

Corporate governance

Corporate governance refers to the policies in an organization that reflect the relationships and responsibilities between management, directors, and stakeholders. These policies are defined and determined in the company’s articles of association and its articles of association, along with the company’s rules and regulations. You want to do business with a company that is ethically, fairly, transparently and efficiently run. Pay particular attention to whether management respects shareholder rights and interests. Ensure that their communications with stakeholders are transparent, clear and understandable. If you haven’t noticed, it’s probably because they don’t want you.

It’s also important to consider a company’s industry: customer base, market share among companies, industry growth, competition, regulations, and business cycles. Learning how the industry works gives the investor a deeper understanding of the company’s financial health.

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