This week's post was inspired by another question from an avid reader.
"What are people referring to when they talk about Fundamental analysis?"
Fundamental analysis uses information available about companies, industries and economies in an attempt to understand and predict price action. The more information a fundamental trader has about the trade the more informed they feel. Thus they seek to fully understand the market in which they are investing before they commit their money. The specific data on the companies can be found in the annual financial reports, which they release to market. For commodities, an examination of more macro factors can give a deeper understanding of the good and where the price may be heading. These factors may include the weather, changes in demand, and even changes in government regulation.
Some examples of types of ratios used in fundamental analysis include; Overall performance, iquidity, profitability, efficiency and leverage ratios. Some of the most common examples are; PE ratios, dividend yield, ROA, ROE and growth forecasts. The trader would then combine these with current events and his own judgement to come to a decision to proceed with a purchase or exit a position.
