What is Fundamental Analysis?

Fundamental Analysis is the analysis of actual company financial data and market data related to that companies business sector and market. Basically, it's looking at the financial health and market growth of the company, by analysing company accounts, reports, statements, markets and so on. In many ways, this gives an overall 'value' placed on the company and where it 'the company' and general opinion on the market that company is, is likely to go. However, in as much as this is a good way to find the value of the company and where the directors believe the company is heading through their statements and where the current market sector may believe it will be heading, tends not to be reflected in the actual trading of that companies stock.

Take A Bite Of An Apple

A good example is Apple stock. As I write this, the stock at one point, a few weeks ago, was worth over $700 USD. Now, in just over 2 weeks, the stock is somewhere near $500 USD. These are just general figures of which I am aware Apple was/is trading at, but they serve for this example. In those two weeks, the value of Apple stock has dropped by $200 USD per share. This is an extraordinary amount of money for Apple to lose in the value of the stock. Now, given such a massive drop in value, you would imagine that Apple gave out some shock news, that they lost billions in profits, or that their products had massive faults and needed a recall. No, in fact, during that time, not long before they had released the iPad Mini, which was a success, not massive, but still sold out. Profits still incredibly healthy and new products in the pipeline and once again kids wanting iPads, iPods and iPhones for Christmas, in fact adults too.

In fact, desire for anything Apple is still as strong as it always has been, since they introduced the first iPhone years ago. What's changed? Well nothing really in terms of the fundamentals of the company. Yet the very living breathing market, that is trading the Apple stock dropped it like a stone. Partly the drop was by a sell out by an investment bank taking profits on Apple stock it held. Part of it was simply that given the meteoric rise of the price on Apple stock, few feared that it was impossible for Apple to keep the momentum going, more so with the lackluster product releases this year - despite record profits once again. Have you managed to see what I am getting at? The stock dropped, based on fear, nothing more. This had nothing to do with the fundamental analysis, Apple hadn't changed in fact had once again grown.

...and The Problem Is!

Here then, is one of the biggest issues that many have about Fundamental Analysis; it's great for finding out the actual market worth of a company and where current hypothesis of the market maybe heading, but other than that, it is not an accurate barometer of what 'the market' does believe the company is worth, which is reflected in the stock price. Also traders reflect their hopes and expectations on a company too. Apple for now is the darling of the Tech Industry, but one day that shine will be removed and someone else will take their place. When that does, for no reason what so ever, the stock will drop, simply because it's not 'trendy'.

Another we could look at is Facebook's IPO float not that long ago. Fanfare and all manner of spin was used to make this seem attractive. Yet, fundamentally it was looking shakey at best. Not broke of course, but given that the company can only profit really from advertising and it's model is no where near as effective as Google's, analysts were wondering how on earth Facebook could ask such a high floating price. When they did open the IPO, the inevitable happened, the stock staggered a little and after a quick peak, dropped in a month or so, to two thirds of it's initial IPO. Personally, I still think it's over priced. Once again, this is where fundamental analysis saw reason. People were looking at the value of the company, the float, the market they were in and where they expected to be and none of it, well little of it made sense. As a result of this, when the stock did float, there was a brief period of bullish activity, as retail buyers went crazy for the stock - every man, woman and dog seemed to be buying stock in Facebook. Then, from those that understood fully, it was over priced and the stock collapsed. Fundamentally, at the start, this is where knowing the fundamentals helped and worked in favour.

As you can see, there are good and bad in fundamental analysis. It will always have it's place. However, as a means of speculation, few if any, from what I know use it, nearly everyone uses Technical Analysis. That doesn't mean you should ignore it, as with the Facebook example, it can help as a means to judge what is likely to happen to a stock, before the trading of a new stock when it goes IPO.

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