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Fundamental Analysis Made Simple.


What is fundamental analysis?

“Fundamental analysis, in accounting and finance, is the analysis of a business’s financial statements; health; and competitors and markets. It also considers the overall state of the economy and factors including interest rates, production, earnings, employment, GDP, housing, manufacturing and management.” Wikipedia

This is the explanation of fundamental analysis according to Wikipedia. When investors decide to invest in the stock market they normally use technical analysis, and fundamental analysis as tools to indicate buying and selling signals. Technical analysis is completely different from fundamental analysis.

Normally investors with a long-term investment plan will rather use fundamental analysis to establish the health of a company now, and in the future. Short-term investors and speculators are more prone to use technical analysis to indicate short movements and signals in order to make profits on a daily or weekly basis. In most cases however, investors will use both. Remember; before the age of computers investors only had the news-paper as a tool.

Fundamental analysis includes company earning information, margin levels, possible competition, wages, and salaries, management, economic and industry conditions. It is a study of everything that can have an effect on a company’s share price or value.

Technical analysis – like charts – cannot always predict what will happen in a company’s share price, and moves in averages to possibly predict a future price. A simple example would be:

Company A-Z manufactures toys for 5 retailers. The technical analysis is in a buying cycle, so you purchase some shares. The following day – on your way to work – you decide to get a newspaper, only to see a headline that says; A-Z lost one of their largest buying retailers. You suddenly realize the share price might drop, because this news influences the company’s performance and possible profit. This is fundamental analysis. It is a study of the influence of factors surrounding the operation of any given company.

It is therefore important to also have information about the companies you invest in. Tomorrow you might pick up a newspaper and see a different headline; A-Z Company now supplies to another 2 retailers, and the share price shot through the roof.

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