Fundamental Analysis

Fundamental analysis is a technique of estimating the future returns from the stocks of a company by analysing its financial statements, market share, competency of management, competitive advantage and many other factors. In order to forecast an accurate return in future, fundamental analysis considers the current as well as historic data.

When it comes to fundamental analysis of a company, there are two types of fundamental factors a trader needs to take under consideration:

• the quantitative factors; and
• the qualitative factors

Quantitative and Qualitative Fundamental Analysis Factors

The quantitative fundamental factors of a company are the ones that can be expressed or measured in numerical terms. These factors include assets, liabilities, revenue, expenses and other financial aspects. On the other hand, the qualitative factors of a company are the relatively less tangible factors which include the quality of the board members or the skills of key executives as well as brand image, proprietary technology and so on. Some experts suggest that in order to do an accurate fundamental analysis of a company, it is important to make sure that a combination of quantitative and qualitative factors are taken into account.

Although many traders these days tends to determine their strategy based on technical analysis, (using charts for analysing the volume and prices) but that may not be the best strategy to follow considering the possible flaws involved with the technique. This is why experts suggest traders to use a combined strategy- the combination of technical and fundamental analysis- to make decisions regarding the trades.

If you are a trader who understands the fundamentals of a stock well then this is definitely going to help you to make better trade decisions than others. Warren Buffet- the US based billionaire is know as one of the greatest traders who has managed to implement fundamental analysis so effectively that it helped him to make a fortune out of his investments. However it is important to keep in mind that fundamental analysis itself is also not free of flaws, so a trader can still make a wrong call by using a combined technique. But that is one reality the traders have to accept.

In case of fundamental analysis, political events, economic releases as well as the company announcements are also taken under consideration. Those who solely follow fundamental analysis for CFD trading often rely on the recommendations of the market analysts to make up their mind about the trades. On the other hand, technical analysts would make their move based on the trend of the share.

The advocates of technical analysis claims that depending solely on the fundamental analysis can turn out to be deadly since in many cases it fails to smell the danger well in advance like, whether the stock of a company will go down drastically from a very impressive position. They use One Tel and HIH stocks as examples to support their claim suggesting that the technical analysis managed to forecast the trouble well in advance that these stocks are going to go down where fundamental analysis could not recognise that. This is why a trader should consider combining the fundamental analysis with chart analysis to minimise the risks on his investments.