What is fundamental analysis?

Fundamental analysis is a method used to evaluate an asset’s current value based on available economic data and the study of factors that can impact its price in the future. It is applied to analyse prices of stocks, bonds, currencies, metals, energy resources, and other financial instruments.

Together with technical analysis, it is one of the main methods to evaluate the market. While technical analysts obtain all the necessary information for trading by studying charts, fundamental analysts evaluate current economic and political conditions, as well as the prospects for their changes.

Fundamental analysis can be seen as a comprehensive approach to evaluating a selected asset based on knowledge in the field of finance and economics.

Key fundamental factors

  • Economic – these are important indicators of a country's economic development, central banks’ decisions regarding monetary policies, and financial statements of companies
  • Political – these are presidential and parliamentary elections, personnel decisions in governments and companies, speeches by famous politicians and top managers of corporations, and significant corporate events in large companies
  • Rumours and expectations – these are political and economic factors at the level of forecasts, assumptions, and unofficial comments
  • Force majeure – these are unpredictable climate, economic, and geopolitical events

Fundamental analysis methods

  • Top-down analysis – this involves studying a subject matter from the general to the specific: from evaluating the overall economic situation to determining the most promising industries and selecting specific stocks within their sectors
  • Bottom-up analysis – this involves studying a subject matter from the specific to the general: from selecting stocks of specific companies to examining all the factors that can affect or potentially impact the whole sector

Fundamental analysis tools

The tools used for fundamental analysis vary depending on the asset of interest. For example, the primary tools for analysing the prospects of a particular company’s stock would be its quarterly and annual reports.

To assess the prospects of fluctuation in the value of a national currency, macroeconomic data are used, which provides a better understanding of the state of the country’s economy. This includes the central bank’s interest rates, inflation rate, GDP levels, employment statistics, and other important economic information.

Advantages and disadvantages of fundamental analysis

Fundamental analysis helps identify promising assets for investment and allows the prediction of long-term trends in the market. However, it requires investors to dedicate a significant amount of time and have specialised knowledge in the field of economics and finance.