Fundamental Analysis (FA) is an essential for any trader or investor’s toolkit. It looks a little deeper to identify undervalued and overvalued assets.
Financial investors and traders want to know whether an asset is overvalued or undervalued, because that will tell them whether or not they should be buying it or selling it.
To find out the true underlying value of an asset or business they use fundamental analysis (FA). This is the name given to the kind of research that tries to take measurements of a company’s health.
Some things, like market capitalization are easily measurable, while other things like reputation are a little bit more nebulous, but by taking multiple factors like these into consideration it’s possible to build up an accurate picture of a business’s overall health and determine whether or not it’s a worthy investment.
It’s too simplistic just to look at previous price history and use it as a signpost for future performance because that tells you nothing about the intrinsic value of the asset. Fundamental analysis (FA) looks at external as well as internal factors, including the microeconomic and macroeconomic conditions that could influence the market that the asset is trading in. And by looking at less tangible elements such as the strength of the company’s leadership, and how the management team has performed in previous business ventures, the details start to add up to a more comprehensive overall picture that can better inform trading decisions.
Fundamental analysis (FA) is also looking to get a better understanding of a company’s trading environment and its potential for long-term success. Analysts use all of this information to arrive at a notional true price that reflects the underlying value of the asset. So, fundamental analysis (FA) gives investors an idea of whether a company is overvalued or undervalued.
Although it’s usually been associated with the valuation of stocks, fundamental analysis (FA) can also be applied to cryptocurrencies too.
Fundamental analysis vs. technical analysis
Fundamental analysis (FA) may avoid historical market data by default, but technical analysis (TA) focusses on it to the exclusion of all else. TA attempts to use historical data to predict future price movements by correlating present trends with their historical analogues.
In truth, both types of analysis have their place, and it makes the most sense for any trader to use both as part of a balanced approach to investment research.