Fundamental analysis is a method of evaluating security in an attempt to measure its intrinsic value, by examining related economic, financial and other qualitative and quantitative factors.
Fundamental analysts study anything that can affect the security’s value, including macroeconomic factors such as the overall economy and industry conditions, and microeconomic factors such as financial conditions and company management.
The end goal of fundamental analysis is to produce a quantitative value that an investor can compare with a security’s current price, thus indicating whether the security is undervalued or overvalued.
Difference between fundamental analysis and Technical analysis
The Fundamental analysis determines the health and performance of an underlying company by looking at key numbers and economic indicators. The purpose is to identify fundamentally strong companies or industries and fundamentally weak companies or industries. Investors go long on the companies that are strong and short the companies that are weak. This method of security analysis is considered to be the opposite of technical analysis.
The Technical analysis differs from fundamental analysis in that the stock’s price and volume are the only inputs. The core assumption is that all known fundamentals are factored into the price; thus, there is no need to pay close attention to them. Technical analysts do not attempt to measure a security’s intrinsic value, but instead, use stock charts to identify patterns and trends that suggest what a stock will do in the future.