What is Fundamental Analysis in crypto trading
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What is Fundamental Analysis (FA)?

What is Fundamental Analysis?

The aim of fundamental analysis is to provide a precise estimation of a particular security’s intrinsic value. The end goal is to arrive at a number that an investor can compare with a security's current price in order to see whether the security is undervalued or overvalued.

Fundamental vs. Technical Analysis

Fundamental and technical analyses are the two basic pillars of investment philosophy and leading schools of thought when it comes to financial markets theory. Both are very different and often oppose each other, which is why there is an everlasting debate between fundamental and technical analysts.

While both analysis methods are intended to help investors research and project the future price of a particular asset, they differ from each other in terms of how they’re applied and the tools they use to come to a conclusion.

  • Fundamental Analysts maintain that markets may incorrectly price a security in the short run but the "correct" price will eventually be reached. Profits can be made by purchasing the wrongly priced security and then waiting for the market to recognise its "mistake" and reprice the security.

Investors can use one or both of these complementary methods for asset picking.

Which type of analysis is right for you?

Investors who base their trading decisions on the intrinsic value of an asset (long-term investors, value investors, etc.), usually prefer fundamental analysis as the primary research methodology. Day-traders, speculators, arbitrage traders, or short-term investors, on the other hand, prefer technical analysis. It gives them a quick and timely forecast of the short-term price movements they’re interested in. Some market participants, on the other hand, try to combine both methodologies to make a more accurate forecast of long-term opportunities

Types of Fundamental Analysis

There are two types of fundamental analysis; qualitative and quantitative. The qualitative type of fundamental analysis involves things like the brand of a company, decisions made by management and performance of the company among other things. The quantitative part on the other hand deals with numbers, drawing conclusions from the financial statements of the company.

There are also two processes of fundamental analysis which are labelled top-down and bottom-up approach.

The top-down approach is an investment analysis approach that analyses first the macro factors of the economy, such as GDP, employment, taxation, interest rates, etc. before examining micro factors such as specific sectors or further yet companies. This approach prioritises macroeconomic, national, or market-level factors.

The bottom-up approach is an investment approach that focuses on the analysis of individual stocks and de-emphasises the significance of macroeconomic cycles and market cycles. In bottom-up investing, the investor focuses his attention on a specific company and its fundamentals, rather than on the industry in which that company operates or on the greater economy as a whole.

The Basics of Fundamental Analysis

There are some primary factors to consider when attempting to perform fundamental analysis for a company’s stock:

  • The structure and revenue of the company
  • The growth rate of the company’s revenue in the last few years
  • The profit that the company has made in the past years
  • Debt structure of the company
  • Turnover rate
  • The management of employees

To start fundamental analysis you first need to thoroughly understand the company. Next is to use financial ratios. You also need to look through the annual final reports and statements of the company. The next step is to look through the financial report of competitors and compare debt structures. Finally, the last step is to analyse the company’s prospects.

Best Tools for Fundamental Analysis

Generally, fundamental analysis can be derived from reports and financial statements of companies but there are some particular tools that are used for analysing a company.

  • Earning Per Share: This is also commonly referred to as EPS and is the most common ratio to determine the profit share of a company's stock. You can calculate EPS by dividing the net income on preferred shares by the number of outstanding shares at the company.
  • Price to Sales Ratio: P/S ratio is a ratio used to compare a company’s stock price to its revenue. This ratio helps to determine the value of a company’s revenue or sales made. It can be calculated by dividing the company’s stock price by the company’s sales per share.
  • Price to Earning Ratio: This is also known as the price multiple or the earnings multiple. Investors use this ratio to determine or value the company’s share price.

Final Thoughts

Fundamental analysis is a vital ingredient of the financial markets’ reality. Today, the days of romantic long-term investing seem to be gone. Instead, investors are seeking short-term profits and ways to exploit momentum trading opportunities. Fundamental analysis still plays a crucial role in the strategies of the most successful investors. In the end, learning the tricks of fundamental analysis is worth it, even if it takes you more time. If you aren’t sure if this method works, just look at Warren Buffet’s net worth

Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.

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