When analysing any sort of market, there are two main types of analysis you can employ. The first is technical analysis, and the second fundamental. In this particular article we would like to focus on fundamental analysis. Fundamental anlaysis involves looking at the background information, or ‘fundamental’ of an asset or company behind the asset. This includes qualitative and quantitative factors.
Qualitative factors are those that are more difficult to asses and include more guess work. What news could affect your asset? If it’s a company, how does the public feel about their service or product? These are the sort of considerations you have to take into account before making up your mind.
Analysis of qualitative factors is relevant to the stock market, so the financial performance of companies. You want to look at several sources of information. This includes their balance sheet, which indicates assets liabilities and equity. You should also look at income statements, statements of cash flows, Auditor’s reports, and annual and quarterly reports.
There is also the idea of the intrinsic value for assets like company stocks. Investors may have differing opinions on how valuable a stock is. They may differ in opinion with how the stock market values a particular stock as well. Some people may not do as much fundamental analysis, focusing mostly on technical analysis. This can lead to them missing the bigger picture of the future of a stock. Therefore, fundamental analysts base their opinion off of the figures in the stock market to decide if a stock is overvalued or undervalued.
With this information, traders can decide to buy a stock when they believe people are undervaluing it. They can then wait for the price to rise and sell when the stock reaches its intrinsic value, or when people start overvaluing it. This is basically the essence off of where the classic idea of ‘buying low and selling high’ arises from.
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