Fundamental analysis is a method used to determine the intrinsic value of an asset by examining related economic and financial factors. Traders and investors use this approach to evaluate whether a security is undervalued or overvalued relative to its current market price.
For stocks, this process involves analyzing financial statements, including balance sheets, income statements, and cash flow statements. Analysts look at key metrics such as the price-to-earnings ratio, earnings per share, and dividend yield. Beyond company data, fundamental analysis considers macroeconomic indicators like interest rates, gross domestic product growth, inflation, and unemployment rates. These external factors influence the overall health of the economy and the specific industry in which a company operates.
In currency markets, fundamental analysis focuses on geopolitical events, central bank policies, and trade balances. By comparing the economic strength of two nations, traders attempt to predict future exchange rate movements.
This method assumes that the market price will eventually reflect the true value of an asset. However, fundamental analysis does not account for short-term market sentiment or price patterns. Trading involves significant risk, and past performance does not guarantee future results. Investors should conduct thorough research before making financial decisions.
How this answer was produced
AI-assisted draft, human-reviewed by AlphaScala editorial against our standards before publication. General education, not advice for your specific situation.