HFM information and reviews
Octa information and reviews
FXCC information and reviews
FxPro information and reviews
FBS information and reviews
Vantage information and reviews

What is Fundamental Analysis?

Understanding the core of an activity always makes it easier to do it regardless of how complicated it is. That is the case with fundamental analysis. While it may be done through various activities, its essence is quite simple, and we will explore it in this article. Fundamental analysis is based on knowledge. It doesn’t have to be wide, but it has to be spot-on, and practical. Olymp Trade’s Help Center is full of useful information. Also, there are specific sections dedicated to starting trading with fundamental analysis for beginners, and for advanced traders too.

This Type of Analysis Focuses on Fundamentals

Forget about the prices and charts for a moment. Think about what they represent. There are economies, companies, people, things being produced, bought and sold, money being paid, transferred, and traveling around the world in different currencies. All these and many more are real processes. They exist without charts and graphs. Therefore, they are primary, or fundamental. Understanding them is what fundamental analysis does.

More specifically, fundamental analysis looks at a trading instrument as a product of a particular company or economy and suggests you understand how that company or economy is doing. Is it fundamentally well or unwell?

If the company or economy is doing well, then the trading instrument that represents it will also likely perform well and promise great potential. If the company or economy is not doing well, then the trading instrument that represents it will similarly underperform, lag behind the market average, and offer dull perspectives.

Once you answer the question posed by fundamental analysis and come to one of the two conclusions summarized above, you can make a trade decision based on that. Now, the question is how to understand whether an economy or a company is doing well? Let’s have a look.

What is Fundamental Analysis in Currencies?

Every country or economic union has its own currency. The United States has USD, Europe has EUR, the United Kingdom has GBP, Japan has JPY, and so on. Therefore, what you’ll have to do is to analyze the news and analytical reports that describe the current and anticipated state of the economy in question.

Usually, if a country or economic zone is experiencing growth and enjoys positive perspectives without major threats ahead, its currency goes up. If a country or an economic zone is in depression, experiencing or expecting troubles, its currency loses value and goes down. As you trade currency pairs, the price performance of each is a result of how strong one currency is against the other one.

For example, if on a given day, there is depressing news affecting JPY and no major news for USD, then JPY will likely lose value against USD. As a result, USD/JPY will go up. If on another day, there is positive news for the GBP and some bad news for EUR, EUR/GBP will likely go down.

Here is a list of the most impactful news for currency pairs.

There are others, too. Most impactful news is all presented in Olymp Trade’s Insights with the experts’ forecasts on the price direction.

What is Fundamental Analysis in the Stock Market?

Stock fundamental analysis looks at the business of the company a stock represents. Specifically, it assesses whether this business brings healthy returns and if it offers promising future prospects. In simple terms, stock fundamental analysis finds out whether the current market capitalization of a business matches its true value.

Among many fundamental approaches to assess a stock, comparative analysis and the stock business evaluation approaches help decide if a particular stock is worthy of being included in your portfolio. Let’s look at these two methods.

Comparative Analysis Using Financial Ratios

This type of stock fundamental analysis is usually applied to compare stocks of the same market sector such as the oil and gas, pharma, or transportation industry. Comparative analysis is based on various indicators and ratios. Among these, P/E, P/S, P/B, and D/P are the easiest to use.

The lower the P/E, P/S, P/B ratios, the better the stock is viewed. The higher the D/P, the better the business is viewed by this approach.

P/E is the company price, or its market capitalization, divided by its earnings. Therefore, it is essentially the business’ pay-off term. For example, if we buy a company for $100mln that generates a yearly return of $10mln, it will take 10 years to have our investment paid off. The sooner that moment, the lesser the period, and the better. P/B divides the company market cap, or its current price, by its book value, or its own capital as per the balance sheet. For example, if we buy a $100mln company that owns several factories with the total value of $100mln, the P/B will be $100mln/$100mln=1. In this case, we would know that what we pay to buy this business is its real value. The lower the P/B, the better for the purchaser of the business. P/S is the company price divided by its sales. Most often, growing sales usually mean strong business dynamics for a company. In the meantime, the lower this ratio, the better it is for the purchaser of the stock.

D/P is a ratio that assesses the company dividend profitability. If we buy a business for $100mln, and it pays a yearly $50mln in dividends, its dividend profitability is 50%. That would mean that one year of owning this business would bring a 50% return on our investment and 2 years would pay us back entirely.

Evaluation the Company as a Business

Evaluation of a company a particular stock belongs to relies on a variety of financial indicators such as the total asset value and liabilities, owned capital, revenue, net income, dividend payout policy. Generally, all stocks can be divided into growth stocks and value stocks. Growth stock companies have actively growing revenues, but they may not pay out dividends. Value stock companies’ revenue may not necessarily grow, but these companies steadily pay dividends. It is optimal to choose a company with low total liabilities. Here is a useful formula for that.

Company Assets=Total Liabilities-Own Capital

Dividing total liabilities by the company assets, we will have the ratio we need. Generally, the lower it is, the better. In the meantime, each industry has its threshold values. For example, it is normal for banks to have high total liabilities. In other market sectors, total liabilities amounting to 70-75% of company assets are an alarming indication.

A growth stock company should bring growing sales. Yearly sales growth of more than 15-20% is considered optimal for such stocks. Logically, if sales don’t grow or drop, the stock cannot be recommended for purchase. Now, the growth stock companies don’t see their sales grow as actively as before. Their yearly sales growth value is often within 5-10%, and it is considered a good stock to buy.

Net earnings are also expected to rise with growth stock companies. It is a key indicator because a company may have high sales but because of high salary payouts, expensive resources it uses, or bad investments, it may have low, zero, or even negative net earnings. Therefore, if the company’s net earnings fail to grow, it’s a bad indication.

Dividend payout police is another key indicator. If a company steadily pays high dividends year after year, it may be a good indication. At the same time, it may mean that the company fails to find investment and strategic expansion possibilities. That’s why, while the “dividend companies” pay good dividends, they often fail to grow. Frequently, the price of such company stocks oscillates within a certain range.

Summarizing Stock Fundamental Analysis

Now, we come to the general summary of how stock fundamental analysis works. Generally, if the company’s business is expanding, sales are growing, and no major obstacles are expected, its stock goes up. If a company is experiencing troubles, sales are not growing that well, business perspectives are uncertain, or it's facing legal problems, its stock loses value and goes down.

Here is a list of most impactful news for stocks:

Similar to currency pairs, Olymp Trade’s Insights covers the stock news as well, providing you with fundamental analysis and signals to follow. In the same manner, fundamental analysis works in all other market sectors. To understand what’s ahead for a trading instrument, fundamental analysis suggests you think things through and not only use charts.


Share: Tweet this or Share on Facebook


What Are Order Blocks In Forex? Unraveling the Impact of Big Market Players
What Are Order Blocks In Forex? Unraveling the Impact of Big Market Players

In the vast and intricate world of Forex trading, the presence of order blocks plays a crucial role in shaping market dynamics. Introduced by large financial institutions and central banks...

Art of Trend Analysis Revealed: Strategies and Types
Art of Trend Analysis Revealed: Strategies and Types

In the intricate world of financial markets, understanding trends is akin to deciphering a vital code. Trends act as a compass, guiding the trajectory of asset prices and heavily influencing trading decisions...

CFD Trading Simplified: Strategies for the Modern Online Trader
CFD Trading Simplified: Strategies for the Modern Online Trader

What if you could trade the global markets with more flexibility than ever before? With CFD trading, you can! Contracts for Difference (CFDs) stand out as powerful instruments within the Forex markets, providing the possibility to capitalize...

Technical Analysis Tools
Technical Analysis Tools

Read on to find out about some of the most popular technical analysis tools that traders can use, such as Bollinger Bands, MACD, and RSI...

Assessing the US 100 Index: Dead Cat Bounce or True Bullish Turnaround?
Assessing the US 100 Index: Dead Cat Bounce or True Bullish Turnaround?

The US 100 stock index (cash) has garnered significant attention in recent trading sessions. Notably, this past Wednesday, the index showcased an upward momentum...

Mastering the Intricacies of Short-Term Trading Analysis
Mastering the Intricacies of Short-Term Trading Analysis

In the bustling corridors of the financial world, short-term trading stands out as a high-octane race, demanding lightning-fast reflexes, unwavering focus, and an adept understanding of market nuances...

Editors' Picks

The Top Forex Expert Advisors 2024: Performance, Strategy, and Reliability Review

An annual roundup reviewing the most successful Forex Expert Advisors (EAs) based on their performance, strategies employed, reliability, and user feedback. This piece would provide insights into which EAs have been market leaders and why.

The Evolution of Forex Expert Advisors: Navigating the Path of Technological Revolution

The concept of automated trading has been around for decades, but the accessibility and sophistication of Forex EAs have seen significant advancements in the past few years. Initially, automated trading systems were rudimentary, focusing on simple indicators like moving averages.

The Impact of EAs on Forex Trading: A Double-Edged Sword

By enabling continuous, algorithm-based trading, EAs contribute to the efficiency of the Forex market. They can instantly react to market movements and news events, providing liquidity and stabilizing currency prices through their high-volume trading activities.

MultiBank Group information and reviews
MultiBank Group
XM information and reviews
FP Markets information and reviews
FP Markets
FXTM information and reviews
AMarkets information and reviews
BlackBull information and reviews

© 2006-2024 Forex-Ratings.com

The usage of this website constitutes acceptance of the following legal information.
Any contracts of financial instruments offered to conclude bear high risks and may result in the full loss of the deposited funds. Prior to making transactions one should get acquainted with the risks to which they relate. All the information featured on the website (reviews, brokers' news, comments, analysis, quotes, forecasts or other information materials provided by Forex Ratings, as well as information provided by the partners), including graphical information about the forex companies, brokers and dealing desks, is intended solely for informational purposes, is not a means of advertising them, and doesn't imply direct instructions for investing. Forex Ratings shall not be liable for any loss, including unlimited loss of funds, which may arise directly or indirectly from the usage of this information. The editorial staff of the website does not bear any responsibility whatsoever for the content of the comments or reviews made by the site users about the forex companies. The entire responsibility for the contents rests with the commentators. Reprint of the materials is available only with the permission of the editorial staff.
We use cookies to improve your experience and to make your stay with us more comfortable. By using Forex-Ratings.com website you agree to the cookies policy.