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Full Fact of Fundamental Analysis in Forex Trading

Updated: Sep 24, 2023

Full fact of fundamental analysis

Analyzing market
Analyzing market

Hey there, middle schoolers! Let me tell you about something super important for investors. It's all about how they make decisions and whether they succeed or not. So, the key difference between a successful investor and an unsuccessful one is the accuracy of the information they use. And guess what? There are lots of ways they can get this information!


One of the most popular methods is called fundamental analysis. Yes, today i am gonna discuss with your about the full fact of fundamental analysis. It's a fancy term, but don't worry, I'll break it down for you. Basically, it means that investors carefully study financial statements and other official stuff. This includes things like letters to investors, press releases, and analyst reports. They do all this to understand how healthy and promising a particular business is.


Now, here's the exciting part. I've got a guide just for you that will teach you everything you need to know about fundamental analysis. Yep, everything! And guess what? You'll even learn how to use it to make your portfolio perform better. So get ready to become a pro investor with this awesome guide!


Analysis of market
Analysis of market

What is Fundamental Analysis?

Fundamental analysis is a way to figure out if a company is doing well or not. It looks at important numbers and information about the company to see if it is worth investing in. This includes things like how much money the company has, how much it owes, and how much it is making. It also looks at other things like how good the company's leaders are and how well its competitors are doing. It even considers things happening in the world, like interest rates and how many people have jobs. By looking at all of this information, fundamental analysis tries to figure out if a company's stock is worth more or less than what it is currently being sold for. This helps investors decide if they should buy or sell the stock.


History of Fundamental Analysis

Experiencing the market
Experiencing the market

Hey there! So, there's this super cool guy named Benjamin Graham who is like the ultimate guru of understanding how money works. He's basically the dad of fundamental analysis, which is a fancy way of saying he knows how to figure out if a company's stock is worth investing in or not. Like, he's a big deal in the financial world and has had a huge impact on how people think about money.


Back in 1934, after the Great Depression messed up the economy, Benjamin Graham and his buddy David Dodd, who were both teachers at Columbia Business School, wrote this book called "Security Analysis". It was a big deal because it told investors to be careful and not get caught up in risky and unpredictable market stuff. Instead, they said to focus on the real value of a company's stock. So basically, they were saying, "Hey, don't be reckless with your money, think smart and invest wisely!"


Isn't it cool how these guys were looking out for people and trying to make sure they didn't lose all their money? It's like they were the superheroes of finance, teaching everyone how to be smart with their investments.

“Astute observers of corporate balance sheets are often the first to see business deterioration” – Benjamin Graham, Security Analysis

This book is like the ultimate guide to understanding fundamental analysis. The authors came up with this cool idea called comprehensive fundamental analysis, which is basically a fancy way to figure out how much something is really worth. They also say you can use it to predict short-term trends in the price of something. But, they didn't really focus on guessing what the price will be in the long run.


The book has over 300 pages all about how to analyze financial statements. They talk about income statements and balance sheets, and they even explain fancy terms like depreciation and amortization. It's like a crash course in accounting!


This book became super famous and important in the world of financial markets. Even though it's been almost a hundred years since it was written, the ideas in it are still really accurate and important.


Fundamental analysis
Fundamental analysis

The Development of Fundamental Analysis

Right after the release of the “Security Analysis” book, fundamental analysis became the main principle and key methodology for asset valuation. It remained so until the digital revolution took over financial markets. From that point technical analysis and other computational valuation methodologies became more mainstream. Despite the introduction of new technologies that shifted investors’ focus from fundamental analysis, today, it still remains an invaluable part of investors’ preferred tools.

In fact, the essence of fundamental analysis and the key accounting issues discussed in Benjamin Graham’s book were later found present in some of our recent history’s major corporate scandals like the cases of Enron and Valeant Pharmaceuticals.

The core of value investing is fundamental analysis. Warren Buffet is arguably the greatest investor of all time. He built his fortune by adhering to the principles of value investing.

“Other guys read Playboy, I read annual reports.” Warren Buffet

Here's a cool thing to know: Benjamin Graham was like a teacher to Warren Buffet, but he wasn't really good at investing himself. The reason was that Graham only cared about whether a company could make enough money to fix any problems that might make its price go down. But Buffet took this idea and made it even better! He started looking at the big picture and thinking about the future. That's why people call it "value investing" now. Buffet wanted to know if a company's current situation and the things happening around it could make it really successful in the future and beat its competitors.

Analysis
Analysis

Fundamental vs. Technical Analysis

There are two main ways people look at investing in the stock market. One way is called fundamental analysis, and the other way is called technical analysis. These two ways are very different and sometimes they don't agree with each other. That's why people are always arguing about which one is better.


Fundamental analysis is all about looking at a company's financial statements and other important information to figure out how much the company is really worth. It uses a lot of data and official statistics to make predictions about the future price of a stock.


On the other hand, technical analysis is all about looking at a stock's price and how much it's being traded. Instead of focusing on the company's value, technical analysts use graphs to find patterns and signals that tell them when to buy or sell a stock.


Technical analysis doesn't really care about how much a company is worth. It just assumes that all the important information is already included in the stock's price. To make predictions, technical analysts use tools like support and resistance, moving averages, and trend lines.


Some people like to use fundamental analysis because they want to invest for the long term and they care about the company's value. Other people, like day-traders or short-term investors, prefer technical analysis because it gives them quick predictions about short-term price movements. And some people try to use both methods together to make even better predictions.


Main differences between fundamental and technical analysis

It's totally understandable that some people like one way of doing things while others prefer the opposite. The truth is, both ways have their own benefits depending on what you're trying to do. So, it's not fair to say that one is better than the other, and there's no definite answer to the argument between fundamental and technical analysis. Actually, it's a pretty good idea to use both methods together because it can make your predictions more accurate.


Types of Fundamental Analysis

There are two types of fundamental analysis – top-down and bottom-up. To get a quick understanding, think of the top-down approach as the global one and of the bottom-up as the local one.


Top-Down Approach

This stuff is all about big things that affect the whole economy, like how well the economy is doing, how many people have jobs, and how much money people have to pay back when they borrow. When someone wants to invest their money, they look at all these things to try and guess what will happen in the future. This helps them figure out which parts of the economy will do well and which ones might not be a good place to put their money. Then they can look at specific companies to find ones that have a good chance of doing really well. The idea is to start with the big picture and then focus on individual companies.


Bottom-Up Approach

The bottom-up approach is like flipping a pyramid upside down and looking at things from a small scale. People who use this method believe that how the economy is doing overall doesn't necessarily reflect how individual stocks are performing. They think that even if a whole industry is struggling, there might still be some stocks that have a lot of potential.


Bottom-up analysts focus on things like a company's earnings, financial statements, and other specific information about the company itself. They want to really understand how the company is doing and what it offers.


There's also another approach called top-down analysis. This is when investors look at the big picture and try to find sectors or industries that are doing well. Then they can narrow down their choices and focus on specific companies within those sectors.


Both approaches have their advantages and disadvantages. Top-down analysis is good for beginners or people who don't have a lot of time to dig into the details. Bottom-up analysis is better for investors who want to find stocks that have the potential to do really well, even when things are tough in the market.


The truth is, there's no one-size-fits-all approach. Different situations call for different strategies, and different investors have different preferences. So whether you're a top-down or bottom-up person, there's a way for you to find success in the stock market.


Other Methodologies

Hey there! So, before we jump into how to do fundamental analysis, let's talk about some other cool ways experts analyze the market. In this book called "A Complete Guide to the Futures Market," Jack Schwager and Mark Etzkorn talk about this thing called the "old-hand" approach. Basically, it's when analysts know the market so well that they can predict price changes like magic!


Now, let's move on to balance tables. These are like comparison charts that show the current supply of something and how it's changed from previous seasons. Analysts also use something called regression analysis, which is a fancy way of using stats to make predictions based on data.


But here's the thing, if you're just starting out with fundamental analysis, all you really need to know are the top-down and bottom-up approaches. They're like the foundation of this whole thing. If you want to take it to the next level, though, you can totally check out those other methods in the book. They're like extra tools to make your analysis even better.


Fundamental Analysis
Fundamental Analysis

How to do Fundamental Analysis

Okay, so like, we can't give you all the answers on how to do this thing called fundamental analysis in just one guide. It's actually a super complex topic that even famous investors like Warren Buffet and Benjamin Graham have written thousands of pages about. They really dive deep into the principles of fundamental analysis and how it can help you make better investments.


But don't worry, we're here to help you out! We're gonna show you a practical way to do this thing using two different approaches called top-down and bottom-up. These approaches are gonna give you some useful tips on how to do fundamental analysis. So, let's get started!


How to do Fundamental Analysis via the Top-Down Approach

Okay, so here's the deal. The top-down approach is all about looking at the big picture. We want to analyze things properly, right? So, we need to consider some fancy macroeconomic factors. These factors help us figure out where a whole sector or industry is heading. Once we know that, we can zoom in and look at specific stocks. The idea is that if an industry is doing great, the stocks in that industry should also be doing great. So, we can pick out the winners from there.


Macroeconomic Indicators
Macroeconomic Indicators

Okay, let's start by finding out about some big economic factors. This will help us understand how different industries are doing. One thing we can look at is the GDP projections for the US and the whole world. We can also check out the interest rates, bond prices, inflation levels, and prices of different things like food and oil.


Now, let's focus on interest rates. This is important for the financial industry, like banks. Banks make money from the interest they charge on loans. So, we can see how the financial market is doing by looking at something called the Financial Select Sector SPDR ETF, or XLF, and the 10-year Treasury yield. If these numbers go up, it usually means interest rates are going up too. And when that happens, bank stocks tend to do well.


But here's the thing, it's not always true. Sometimes, even if interest rates go up, banks may not do well. We need to look at other things too, like how the economy is doing overall. If the economy is not doing well when interest rates go up, then banks may struggle too.


We can also use interest rates to understand the housing and construction industry. When interest rates are low, it means that getting a home loan is more affordable. And when that happens, more people want to buy houses and there's a big demand for construction materials. So, the construction industry booms.


So, by looking at these economic factors, we can get a better idea of how different industries are doing. It's like putting together puzzle pieces to see the whole picture.


Commodity Examples

Commodity Examples
Commodity Examples

When we talk about how prices of things we use every day can change, a good example is looking at the price of oil and the companies that make oil. These two things are connected, and if the price of oil goes up, the price of the companies' shares usually goes up too. Let's look at an example: the price of Crude Oil Futures contracts (CL) and the share price of Exxon Mobil Corporation (XOM). What we can see is that when the price of oil goes up a lot, the price of the company's shares also goes up a lot.

We can also use a similar approach when we want to understand how the stock market is doing in a specific country or region. We can look at things like how much money the country is making (GDP projections), how many people are out of work (unemployment levels), how well the economy is doing, and other important things. By looking at all of these factors together, we can get a better idea of how the stock market might change.


How to do Fundamental Analysis via the Bottom-Up Approach

When investors use the bottom-up approach, they don't worry about what's happening in the overall market or the big picture stuff at first. They only care about the specific details of individual stocks and how they compare to other companies in the same industry.

But what are these stock details exactly? Well, we can split them into two groups – numbers and qualities. The numbers are things we can measure, like how much money a company makes. The qualities are more abstract, like how good the company's reputation is. Let's explore both of them.


Qualitative Fundamentals

Qualitative stuff is like the intangible things that are hard to measure with numbers. It's not about how big or how much there is. Let's check out the top qualitative things:


Business model and competitive advantages

This super important thingy is what makes the company special and different from all the other companies out there. It's not something you can measure with numbers or anything like that. Obviously, investors really like companies that have this cool advantage over others.


Management

Most experts agree that this thing is super duper important. Like, it can make or break a company's success. The way the bosses run the show and their style really affects how well the company's stocks do. There have been tons of cases where companies with bad management totally flopped and didn't reach their full potential. If you want to know how a company is run, it's smart to check out the backgrounds of the bosses and see how they did in their past jobs.


The power of the brand

Investors know that brands like Nike are super powerful because they have a bunch of loyal customers. This is really important when trying to predict how well a business will do when things get tough, like during a recession or when there's a lot of competition. Companies with strong brands can handle these challenges and even keep growing.

There are also other things to think about when deciding if a business is a good investment. These include how much the whole industry is growing, the rules and regulations for that industry, what the competition is like and how they act, the types of customers the business has, any special technology or patents they have, and how much control they have over the market.


Quantitative Fundamentals

Imagine these as numbers or measurable qualities that describe a specific company. When we try to figure out how much a stock is really worth, we use the bottom-up approach. This method uses different tools like financial ratios, growth metrics, and other stuff. Let's check out the most popular ones:


Earnings-per-Share (EPS)

The EPS ratio is like a report card for a business. It shows how well the company is doing and how much money it makes for each share. If the EPS ratio is high, it means the company is doing really well and making lots of profit. So, if you're thinking about investing your money, a company with a high EPS ratio is a good choice because it's likely to make you more money too!


Price-to-Earnings (P/E)

The ratio thingy tells you how many times a company pays out money compared to how much its stock costs. It's like checking if a job pays a good salary compared to how much you have to pay to get it. If the ratio is low, it means it's a good deal to invest in that stock. But if the ratio is too high or too low, it means the stock is either too expensive or too cheap, and its price will soon change to be fair.


Price-to-Book (P/B)

The P/B ratio is like a cool tool that tells us how valuable a stock is compared to the worth of the business it belongs to. If the P/B ratio is higher than one, it means the stock might have a chance to grow faster than what the business is actually worth. When you calculate this ratio, don't freak out if you get numbers that are way bigger than 100. It's totally normal for stocks that have a lot of potential to grow!


Return on Equity (ROE)

ROE is like a super cool tool that lots of people use to figure out how well a company is doing. It shows how good a company is at using the money that belongs to the people who own it. If a company has a high ROE, that means it's really good at using that money and being efficient.


Beta (β)

The Beta is like a super important tool that helps you figure out if a stock is connected to the rest of its group. To find the Beta, investors compare the stock to a special standard, usually a group of stocks called an index. The Beta can be any number between 1 and -1, but sometimes it can go even higher or lower than that.

  • Covariance – the stock’s return relative to the one of the market

  • Variance – how the market moves in comparison with its mean

If the β is less than zero, it means the stock moves in the opposite direction of the benchmark. The smaller the β, the stronger the opposite movement. A smaller β also means the stock is less likely to change a lot and make big profits. On the other hand, if the β is greater than zero, it means the stock moves in the same direction as the benchmark. A higher β not only means a stronger connection, but also more chances for the stock to change a lot and make bigger profits.


Projected Earnings Growth (PEG)

So, there's this thing called an indicator that can help you figure out how much you'll have to pay for each unit of expected earnings growth. It's pretty cool because even if a stock has a high P/E (price-to-earnings) ratio and a high PEG (price/earnings to growth) ratio, it can still be a good investment opportunity.


Now, let's talk about the PEG ratio. It's like an upgrade to the P/E ratio because it adds another important factor called EPS growth. This makes the ratio more complete and helps us make more accurate predictions. The PEG ratio actually shows us the real value of a stock, which is super helpful for investors. It lets them easily find stocks that are undervalued (worth more than they're being sold for) or overvalued (worth less than they're being sold for).


Dividend Yield and Dividend Payout Ratio

Hey there! Have you ever heard of value investors like Warren Buffet? They're super smart investors who like to use this cool tool called an indicator to figure out if an investment is worth it. This indicator shows how much money a business gives back to its shareholders as dividends. It's like a percentage of the money they make that they share with the people who own a part of the company.


But wait, there's more! There's another indicator called the Dividend Payout Ratio. It helps investors estimate how much money a company will give out as dividends. But here's the thing, these numbers can be a little tricky to understand on their own. You have to look at them along with other information to really get the full picture.


Let's say the Dividend Payout Ratio is 20%. That number by itself doesn't tell us much. For example, some companies that are growing really fast might not give out a lot of dividends because they're using their profits to make the company even bigger. On the other hand, companies that give out a lot of dividends might be older and not growing as much anymore.


There are lots of other fancy metrics and stuff that investors use to analyze investments, but we don't want to overwhelm you with all of that right now. We just wanted to give you a taste of what fundamental analysis is all about and show you some of the main tools that investors use. This will help you understand the investment world better and build up your knowledge. Cool, right?

Analysis
Analysis

Fundamental Analysis Tips and Tools

Hey there! By now, we should know what fundamental analysis is and how it works. Now, let's focus on some tips and tools that can make the process easier for us.


To do a proper fundamental analysis, it's important to get official corporate data. Public companies usually share their financial statements and letters to investors on their websites. But private businesses don't have to do this, so it can be hard to find information about them. Luckily, there are tools like Power bot that can help us find corporate information for free.


If you want to see how a stock has performed over time, you can use Trading View. It has cool charting features that let you visualize the stock's performance. And if you're more advanced, you can even explore different technical indicators.


Another great tool is Simply Wall Street. It helps you do the math behind a stock's valuation. It calculates ratios and metrics and presents the results in easy-to-understand infographics and charts. Even beginners can use it for fundamental analysis.


If you're looking for a software that has everything you need for fundamental analysis, give Finviz a try. It's a stock screener, heat map provider, news compiler, and more. You can use it to see how different stocks or assets are connected. It also helps you stay updated on important events that can affect stock prices. And of course, you can use it for research too.


So there you have it! These tools can make fundamental analysis a lot easier for us. Have fun exploring and analyzing stocks!


Platforms

Hey there! Let's talk about trading platforms, which are super important when it comes to trading. Basically, these platforms are like tools that help you analyze and understand the stock market. Some of the top brokers have really cool platforms that are easy to use and have lots of features. And guess what? They're usually free!


Now, there are different types of analysis you can do to understand the stock market better. One type is called fundamental analysis. Don't worry, you don't have to start from scratch! There are plenty of resources online that can help you with this. One website called Seeking Alpha is a great place to start. They have awesome industry analysis and reports that can teach you a lot about different economic sectors.


Another cool thing you can do is read about different industries. This will help you understand how they work and what affects the prices of stocks in those industries. For example, if you're interested in technology, you can follow some experts on Twitter who give recommendations and stock picks. It's a great way to stay updated and learn from the pros!


So, remember, trading platforms are like your best buddies in the stock market. And don't forget to use resources like Seeking Alpha and Twitter to learn more about different industries and get expert advice. Happy trading!


To conclude

Yo, check it out! So, like, fundamental analysis is super important in the financial world these days. Back in the day, people used to invest for the long haul and all that mushy stuff, but now it's all about making quick money and finding ways to take advantage of trading trends. But guess what? Even with all this short-term craziness, fundamental analysis is still a big deal for the smartest investors out there. It might take a bit more time to learn, but trust me, it's totally worth it. Just look at Warren Buffet, man! That dude's loaded because he knows his fundamental analysis game. So, if you wanna be a money-making pro, you better get on board with this stuff!

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