Fundamental Analysis

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What is Fundamental Analysis?

The fundamental analysis intends to uncover an asset’s real value. That is a calculation of the asset’s value without considering market value or sentiment. Fundamental analysts use resources like financial statements, industry trends, and market releases to make their calculations. 

Why Fundamental Analysis Is Important For Traders?

Long Term Investing

Fundamental analysis is suitable for long-term investments based on long-term trends. Through these analyses, traders can predict long-term financial, demographic, technological, or consumer trends and profit by investing in the assets with the best performance in the long run.

Knowing Companies Better

Thorough fundamental analysis can help traders find companies with valuable assets, a strong balance sheet, stable earnings, and staying power. By doing so, traders can invest in companies that will not likely decrease their value over time. That means their risk is low, and the profit only increases.

Understanding An Industry

In addition to understanding the business, fundamental analysis allows traders to understand the critical value drivers and companies within an industry. By studying these groups, traders can better position themselves to identify high-risk, low-risk, growth-oriented, value-driven, non-cyclical, cyclical, or income-oriented opportunities.

Understanding Business World

One of the benefits of fundamental analysis is developing a thorough understanding of the business world. After endless research and analyses, a trader will be familiar with the company's critical revenue and profit drivers. That can help traders avoid bad companies and identify those that are doing great and have excellent potential.

How Fundamental Analysis Works?

Through fundamental analysis, traders decide if they should buy or sell an asset by studying data published by companies or public institutions. They can identify buy and sell signals, figure out an asset's real value and analyze macroeconomic trends that could impact an asset's valuation.

Depending on which asset class they analyze, many fundamental variables may be fit. Interest rates can affect bonds and currencies, while competitive advantage and financial ratios can affect a shares' value.

These variables can be categorized into quantitative and qualitative.

Quantitative fundamentals are variables that are measured in numbers. These variables are beneficial as traders can compare assets in the same class or industry. Some examples are the P/E ratio, revenue, and current liabilities. All these quantitative indicators exist in companies' financial statements.

Qualitative fundamentals are variables that cannot be measured in numbers. These fundamentals can be a country's corruption level or a company's board of directors. Every trader can interpret these factors differently, and it is more challenging to compare than quantitative fundamentals.

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