LML Group Hong Kong's Dave Martin has this to say about fundamental analysis: It is based upon financial statements of a company, a review of its management, and its relative strength in its market sector. In a broader view fundamental analysis looks at the economy, production such as GDP, broad measures of earnings, interest rates, and the national currency versus those of competitors.
In the stock market fundamentals look a company’s stock value and try to predict whether it will go up or down and how much based upon projected business performance. This view of stocks looks closely at company management and how the company makes and executes business decisions. Credit risk is part of this as well just how well products by competitors are doing.
A basic part of fundamental analysis is the Gross Domestic Product (GDP). A more detailed and accurate part for a company is its own production numbers, products in the pipeline, history of success in bringing successful, profitable products on line, and its ability to penetrate untapped domestic and foreign markets.
Analyzing fundamentals is how to make sense out of stock market news. Looking at another possible stimulus plan fundamentals would say that projects like a number of high speed rail projects would benefit railroads connecting major cities and companies that have already develop high speed rail systems.
Analysis of market fundamentals would have said last year that a stimulus program that promoted government jobs would have done less for the economy than one that promoted small businesses as well as factory and labor jobs. Both fundamental analysis and technical analysis have their place in the investing universe. The practical point is for the investor to learn each skill and know when to use one or the other to best profit from the stock market.
In the coming year investors will need to look at stocks that have done well and decide if fundamentals indicate that they will continue to profit in the recovery. Investors also need to watch technical indicators as some are predicting an M shaped recovery with a big dip in the middle. As usual everyone has an opinion on the market. However, the individual investor gets to pick his or her stock or stick with a market index fund. The advantage of an individual stock is that a given stock may have very strong fundamentals even when the overall economy and stock market are in recovery mode.
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