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Fundamental analysis

Introduction to share valuation

Fundamental analysis: In order to make an investment, it is necessary to analyse not only listed companies, but also the environment and the sector in which they are located. It is also important to see the right time to trade on the stock exchange. Stock market analysts generally use fundamental and technical analysis as a reference tool to try to analyse the market and predict its future development.

Fundamental analysis is the examination of all information available on the market about a given company, in order to obtain its real value and thus formulate an investment recommendation. The analyst comes from the past, collects and analyses information and makes an assessment based on his or her predictions of future developments. The analyzed information is the so-called “fundamentals of the company”. The rationale for using this type of analysis is to predict the future behaviour of a given company on the market, i.e. to stay ahead of the market. For this to be true, a basic assumption must be made: “the market is not efficient in the short term, but it is efficient in the long term”. Otherwise it would be impossible to predict the market. Today, the share price does not reflect the true value of the company, but it will do so in the near future. The primary analyst attempts to discover undervalued or overstated shares based on certain information that has not yet been collected by the market.

Since a company’s fundamentals are analyzed on the basis of public information, it is difficult to think that an analyst will get more accuracy in his or her analysis than his or her competitors. And since there will be many well-informed analysts with the same values, it is difficult to get information that is not included in the prices. Only the most experienced and/or talented analysts can gain any advantage, although this will be for a very short period of time. The secret is not to identify good market opportunities, but companies that will exceed market expectations of them. That is why fundamental analysis is difficult. It is not enough to make a good analysis, you have to do it better and faster than others.

Value and price

 Before we start explaining fundamental analysis techniques, it is important to distinguish between the concepts of price or company price and its value. In other words, the price is the amount agreed between the buyer and the seller to carry out a buy-sell operation; it is data obtained from the market and is therefore objective data. On the other hand, value is an abstract concept, since the objective is to obtain, through mathematical calculations, a reference in quantitative terms that allows a comparison with price in order to determine whether the execution of an asset transaction (purchase or sale) enriches us or not.

 It should also be remembered that, in general, share prices contain not only rational but also unreasonable elements. Social movements, waves of optimism and pessimism can sometimes have a decisive influence on market behaviour. For example, in times of uncertainty about the evolution of the economy, social attitudes may lead to share prices deviating from their intrinsic values (basic or objective). Positive feedback from powerful media can also cause the share price to rise “unreasonably” above its intrinsic value.

Objective of fundamental analysis

 The primary objective of the Basic Analysis, as mentioned above, is to predict the future behaviour of the shares in the market, which means calculating and obtaining the intrinsic value of the shares, i.e. the value at which the price will develop. This intrinsic value is what is commonly referred to as the target share price. Not only do you need to know if the company will grow a lot or a little over a certain period of time, if it has a convenient financial structure, but once all this is known, you need to know if the company has the potential to overestimate or not.

Getting the target price or intrinsic value of a company is not easy. It is a process of making a large number of estimates, both of macro-economic variables (interest rates, exchange rates) and micro-economic variables (price increases in a given sector, volume increases, etc.).

Once information has been collected, it can be treated in many different ways. Examples include

Analysis of the company’s strategic prospects (barriers to market entry, cost competitiveness, distribution potential, brand awareness, international development, etc.; in short, threats, opportunities, strengths and weaknesses).

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