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.
KEY TAKEAWAYS
Fundamental analysis is a method of determining a stock's real or "fair market" value.
Fundamental analysts search for stocks currently trading at prices higher or lower than their real value.
If the fair market value is higher than the market price, the stock is deemed undervalued, and a buy recommendation is given.
If the fair market value is lower than the market price, the stock is deemed overvalued, and the recommendation might be not to buy or to sell if the stock is held.
In contrast, technical analysts favor studying the historical price trends of the stock to predict short-term future trends.
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