The fundamental analysis is a technique of analyzing the current and future values of assets and factors that can influence their future prices. Besides fundamental analysis, another method used to analyze assets’ values is technical analysis.
The fundamental analysis focuses on internal and external factors that can influence the securities’ prices such as economic performance, management, political struggles, etc.
On the other hand, technical analysis focuses on charts and price movements. Investors rely on trading patterns, trading indicators, trading volume, etc. when analyzing the trend and future value of the securities.
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Factors to consider in fundamental analysis
- Price to books ratio
- Net profit
- Price to Earnings (P/E) Ratio
- Return on Equity ratio
- Profit Margins
- Etc
What are the benefits of Fundamental Analysis?
- Investors can make unbiased decisions: By using fundamental analysis, investors and traders are able to analyze companies based on facts in hand and past performance data of the company or assets. This increases their chances of making the right investment decisions.
- It is easy to predict the long term value of assets: Fundamental analysis is the best way to predict the long term value of assets. This method lets investors focus on the future value of assets instead of worrying about short-term price fluctuations.
What are the disadvantages of fundamental analysis
- It takes longer to make a decision: Fundamental analysis requires a lot of work before coming to an investment decision. In order words, not only that you analyze the past performance of the company, but you also analyze future factors that will affect its performance which include the internal and external factors.
- It is difficult to tell the future: Even if you have done your homework, you cannot be certain about the future. There are chances that a company you invested in may underperform the market or miss your expectations based on factors that you could not anticipate. As a result, you could lose money on your investment.
