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What is Fundamental Analysis

CM trading’s guide to fundamental analysis

If you can’t quite see yourself opting for social trading, you may well be considering fundamental analysis as your Forex strategy. We at CM trading are passionate about assisting traders of all backgrounds and aims, so here’s our handy starter’s guide to fundamental analysis.

What is 'Fundamental Analysis'?

Fundamental analysis is a Forex strategy. It involves making decisions about the worth of a currency or security by an in-depth analysis of the factors affecting the actual business/currency itself. You could also opt to use this on an industry, a country's economy and more.

In short, it involves looking at the ‘economic wellbeing’ of a security or currency, rather than simply relying on analysis of its price movements on the market. It can be an interesting way to analyze stocks and currencies, which is why CM trading believes it offers good value to investors confident enough to use it.

The Basics of Fundamental Analysis

As explained above, Fundamental analysis hinges on asking the right questions about the currency or security's background. For example, these could include whether or not they’re in a position to beat out competitors, or how honest their accounting style is. Issues creep in in that, as this is a very broad strategy, and those questions can all have very detailed answers.

There are two classes of fundamental factors- quantitative and qualitative. Quantitative means a number can be attached to it. Qualitive means you have to evaluate the ‘character’ of the factor- how good is a company’s new executive? A country’s new president? Neither of these methods is better than the other, and most fundamental analysis pros combine both to make their decisions. In short, fundamental analysis tackles the idea that figures don’t tell the whole story regarding the worth of a stock.

An Example of Fundamental Analysis

Here’s a short walk through fundamental analysis strategies using an example:

Say you were considering investing in an established company such as a famous toothpaste manufacturer. Taking an approach of fundamental analysis, you might start by considering not the company, but the overall economy and market- how is the world faring? Is this a world that will still have toothpaste demand? Once you’ve established your baseline here, you can narrow your focus to the industry- health and beauty products. How is this industry doing? How is the market treating it? Get tighter, and consider the industry- toothpaste. What trends, demands and surpluses have shown recently? Are their more popular competitors? Then you will focus on the company itself- how are its profits, financial statements, have there been any recent management changes and more.

CM trading believes that there is a lot of value in the fundamental analysis approach, although it isn’t the only method of analysis there is on the market. You should choose a strategy you are most happy with.

fundamental analysis

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