What is Fundamental Analysis in Online Trading?
In theory, the fair value of a bond or an equity share is the sum of the discounted value of the likely future cash flows. The assessment is simpler in a bond, as the cash flows are predefined and end at a given time. Equity earnings are not predefined, and equity is an uninterrupted investment with no pre-set maturity date. The focal point in equity assessment is on the future earnings and the estimates of growth in earnings.
Fundamental analysts uphold that the market may misprice securities in the short run, but prices would combine with the securities’ fair value or inherent value in the long run. Consequently, profits in investments come from identifying a good investment option and making the investment at the right price. This thought process disagrees with the Efficient Market Hypothesis (EMH), which disseminates that share prices incorporate and reflect all pertinent information.
Fundamental analysis deems both qualitative and quantitative dimensions of a business.
While financials will disclose a history of the business and the financial readiness to grow in the future, estimate aspects such as the economic conditions constructive to the business, the ability of the management to identify and exploit opportunities, the operating efficiencies that the business possesses, and the risks that may affect the strategy and its skill to meet this eventuality, will define the attractiveness of the business as an investment scheme.
For That Reason, Fundamental Analysis Includes the Following:
Economic analysis
Industry analysis
Company analysis
The fundamental analysis could also be triggered by changing international and national macro-economic factors, like GDP growth rates, inflation, interest rates, exchange rates, productivity, costs of commodities, regulatory aspects, and others. This can guide an analysis of their impact on different industries and then search for the best businesses in the industry.
This is a known top-down approach to fundamental research. For instance, the regulatory uncertainty regarding spectrum auction in the telecom sector in India would trigger a re-look at the industry’s prospects and its impact on the different companies in the sector.
On the other hand, sometimes analysis is activated by some news or information on some company, which may move to industry analysis and then economic analysis to see whether broad industry and economic parameters favor the corporation. This is known as the bottom-up approach to fundamental research.
Indeed, at times, bottom-up analysts focus purely on dynamics of business and industry with little or no attention to the Economic factors as their focus remains on buying and holding primarily strong businesses which would perhaps do well across the economic cycles, such as pharmaceuticals, consumer goods, and other such businesses.
