What is Fundamental Analysis?

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Fundamental analysis (FA) measures a security's intrinsic value by examining related economic and financial factors. Intrinsic value is the value of an investment based on the issuing company's financial situation and current market and economic conditions.Fundamental analysts study anything that can affect the security's value, from macroeconomic factors such as the state of the economy and industry conditions to microeconomic factors like the effectiveness of the company's management.The end goal is to determine a number that an investor can compare with a security's current price to see whether the security is undervalued or overvalued by other investors.

Definition

Fundamental Analysis (FA) is a method of evaluating a security's intrinsic value by examining related economic and financial factors. The intrinsic value is based on the issuing company's financial condition and the current market and economic conditions. Fundamental analysts study any factors that can affect the value of a security, from macroeconomic factors like economic conditions and industry environment to microeconomic factors like the effectiveness of company management. The ultimate goal is to determine a number that investors can compare with the current price of the security to judge whether it is undervalued or overvalued by other investors.

Origin

The origin of fundamental analysis can be traced back to the early 20th century, as financial markets became more complex, and investors sought more systematic methods to evaluate the value of securities. In 1928, Benjamin Graham and David Dodd detailed the principles of fundamental analysis in their book "Security Analysis," which is considered a foundational work in modern securities analysis.

Categories and Features

Fundamental analysis can be divided into qualitative and quantitative analysis. Qualitative analysis focuses on non-numeric factors such as company management, brand value, and market competition, while quantitative analysis involves numerical data such as financial statements, ratio analysis, and economic indicators. The advantage of qualitative analysis lies in its assessment of a company's soft strengths, whereas quantitative analysis provides a more objective evaluation of financial health.

Application scenarios for fundamental analysis include long-term investment decisions, value investing strategies, and risk assessment. Its advantages include providing deep insights into companies and markets, but its disadvantages may include requiring significant time and data analysis skills.

Case Studies

A typical case is Apple Inc. In the early 2000s, fundamental analysts predicted an increase in Apple's stock value by evaluating its innovation capabilities, market share growth, and financial health. Indeed, Apple's stock significantly increased over the following decade, validating the effectiveness of fundamental analysis.

Another example is Tesla, Inc. Despite facing financial challenges in its early stages, fundamental analysts believed Tesla's stock was undervalued by analyzing its technological innovation and market potential. As the electric vehicle market expanded, Tesla's stock price also rose.

Common Issues

Common issues investors face when applying fundamental analysis include misunderstanding data and over-relying on historical data. A common misconception is that fundamental analysis can precisely predict market movements, whereas it is more suited for long-term trend analysis. Additionally, investors should be aware of biases that market sentiment and short-term fluctuations may cause.

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