Ways to Conduct Fundamental Market Analysis

Learn the tricks of the trade when it comes to fundamental market analysis

The global financial markets present new investors and seasoned professionals with many opportunities. In and among the mix of lucrative investment options are many obstacles that need to be obviated in the process. A thorough understanding of the market mechanisms bodes well for investors and acts as a solid foundation upon which to base real-money investments. Note that the economic markets are always characterized by risk and volatility. This cannot be avoided, regardless of which investment approach is taken. However, sound structural analysis of your preferred investment arena is the starting point for good financial governance. For new traders looking for insights into their proposed investments, fundamental market analysis is paramount.

Reasons for Conducting Market Analysis

The geopolitical forces that shape our economic landscape have a very real impact on investment decisions and investment outcomes. The recent upheaval in Syria and the near-economic collapse in Greece and Portugal weigh heavily on the minds of investors the world over. Many novice investors tend to consider their own geographic domain as separate from the world economy, but the interrelatedness of all global economic activity necessitates a need for careful scrutiny of multiple variables, policies, politics and economic indicators. This is especially true when the actions of the Federal Reserve Bank in the USA can have ripple effects – for better or worse – on the economies of other countries. While the dollar is largely accepted as the world’s reserve currency, it is competing with the Japanese Yen, the Euro and the Great British Pound (among others) in bustling markets across Continental Europe, the Americas, Australasia and Africa. As of 2012 figures, 61.2% of official foreign exchange reserves were denominated in US dollars, 23.7% in euros and 3.9% in GBPs and JPY. This type of information is important when understanding forex options and FX binary options trading in your investment portfolio.

Analysis of the Stock Markets Pays Dividends

Contrary to the opinions of some that gambling and stock market investments are one and the same thing, there is a way that investors can make safer decisions than gamblers. For example when you spin a slots game, you know that the house always has an edge, but with investments you can pick and choose where you want your hard-earned money to be invested in the hopes of generating a return. Fundamental analysis is your best friend when it comes to analysing investment opportunities. With fundamental analysis you will learn to understand precisely what information is relevant and significant in a balance sheet and an income statement. Other issues such as assets, liabilities, expenses and revenues come into play too. Finally a company’s cash flow statement provides you with a snapshot of the viability of a company to meet its obligations. All manner of information can be gleaned about a company’s performance – both quantitative and qualitative data. The full picture that is painted allows investors to explore the relative strengths and weaknesses of various stock options.

Important Information to Consider with Financial Analysis

Stocks are offered for sale by companies in order to raise capital for the expansion of the company. However, just because a company is offering stock options does not mean that they are a viable investment option. Fundamental analysis allows investors to delve deeper into the markets by scrutinizing things like the profitability of the company, the company’s strategic position, the company’s revenue/debt ratio, the transparency of the company and more. The list of considerations that need to be taken into account with fundamental analysis are many. Suffice it to say the aforementioned factors constitute an effective analysis of the fundamentals. There are also 2 important types of data to be evaluated: quantitative (that which can be measured) and qualitative (quality-related aspects). Within the range of variables to be considered with commodities like oil, gold, silver, copper and others there are also speculative aspects that investors look towards.

The ‘perception’ that an investor/trader has regarding a specific stock, trading option or investment is equally important. This concept is derived from the notion that the price of the option does not reflect its true market value. This is known as the intrinsic value of the option. In many financial investments it is this intrinsic value that determines whether or not an investment is sound. Note that in many instances it is not a requirement that fundamental analysis of the intrinsic value be grounded in absolute quantitative or qualitative data. But if an investor feels that a stock is undervalued, he or she may be very tempted to purchase that stock option in the hopes that the market price will rise and he/she will enjoy profits from the purchase. The concept of seeking out the intrinsic value of stocks is really what fundamental analysis is about. That is where market models, charts, predictive software and all manner of ‘estimation’ or ‘forecasting’ methodology come into play.

Diversification is Key to Long Term Success

Regardless of the option that is selected for an investment, it is imperative to spread your risk across multiple options. For example, stocks, bonds, binary options, FX, Certificates of Deposit, real estate and other investment options abound. Depending on your appetite for risk and your preferred duration of investment types, your basket of goods will differ. In any event, it is important to use a broker that is credible and offers many value-added extras in the mix. Fundamental Analysis can certainly assist in providing a clear picture of the investment landscape, but it is by no means a perfect technique. It appears that in the long term, the efficiency of the market will likely eliminate any and all imbalances that lead to excess returns.

About the author: Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes informative essays for the globally renowned spread betting and CFD trading provider, InterTrader.com.