What is fundamental analysis and is it useful?

If you are interested in the world of the stock market, this article will provide you with the knowledge you need to make a good analysis of the assets you are considering investing in. Indeed, even before acquiring shares, you need to carry out some analysis of the situation of the company issuing them. This is where fundamental analysis comes in, as it allows us to know the value, performance and financial health of a company and therefore to assess its profitability.  

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What is fundamental analysis and is it useful?

Questions to ask yourself:

Before all, you will have to keep in mind a certain number of questions preliminary to any stock exchange operation, namely all that relates to the turnover of the company, its profits, its position vis-a-vis competition, its solvency or its possible debts. Thanks to the fundamental analysis, you will be able to answer all these interrogations and thus to know if it is interesting or not to treat the securities of the targeted entity.

Of course, this analysis takes into account a lot of data and consists of both qualitative and quantitative data. As far as the qualitative aspect is concerned, it actually corresponds to the specificities of the company including non-material factors such as patents, brand, products and more generally the reputation of the company.

We will also take into account the experience and know-how of the company's managers, which will give us an overall view of the way the company is managed, but also of its positioning in relation to the competition in the same sector of activity.

The quantitative analysis will mainly take into account figures such as assets, profit, result, balance sheet and market research.


Data to be taken into account in the fundamental analysis :

To obtain the quantitative values of a company, one must use financial and accounting analysis and study both present and past values. Market research, on the other hand, links to technical analysis, as it uses the fluctuation of basic indicators such as volume and price to determine market sentiment.

But fundamental analysis also requires taking into account the financial analysis of the listed company. To do this, we will study the value of the share and try to find out if it is undervalued or overvalued.


Fundamental versus technical analysis :

If the fundamental analysis of the securities of a company is essential to any stock exchange trader, it is not enough to establish an effective long-term strategy. Indeed, this type of analysis is complementary to the technical analysis and it is thus advisable to systematically compare the results of these two studies to determine in a sure way the possibilities of evolution of the prices of these assets.

Clearly, fundamental analysis is nothing more than a tool to be used in correlation with any other conclusive indicator. But it also offers an additional possibility to technical analysis in that it allows you to determine how the market will react to the different data studied. To do this, you will of course have to use your logical mind, but also compare the current situation with a similar situation in the past or with another company in the same sector.

If you spot a particular case that has caused a strong reaction from investors in the past and thus influenced the share price up or down, it is quite possible that the reaction will be the same again. As you will have understood, fundamental analysis requires a good knowledge of the company's stock market history and is therefore easier to apply to older companies, as newer ones have little history.


How to make a good fundamental analysis of a stock?

As you have now understood, fundamental analysis is an indispensable method to evaluate the possibility of rise or fall of the price of a value such as a stock exchange share. Thus, if you are considering taking a position on a stock, you must pay attention to various basic fundamental indicators and current fundamental indicators. Here are the things you need to watch out for:

For the fundamental analysis of the current value of a company, the following indicators will be used:

  • The financial indicators that allow to determine the value and the overvaluation or undervaluation of the company and its stock using different stock market ratios. These indicators allow you to determine whether the share price is higher or lower than its real estimated value and will therefore help you determine in which direction it is wiser to take your positions.
  • A company's strengths and weaknesses: By comparing a company's strengths and weaknesses, you will be able to determine its attractiveness to investors. A company whose strengths outnumber its weaknesses will have a greater chance of improving its growth and becoming more profitable in the years to come.
  • An analysis of opportunities and threats: The economic and financial environment in which a company evolves is also important since it allows to determine the opportunities that the company could seize to accentuate its development or the threats which can slow down its profitability.
  • Strategic plans implemented by the company: Most publicly traded companies easily communicate their strategies and annual or multi-year objectives. This is a key indicator of whether or not the company is able to deliver on its promises.

As for the future of the company, in addition to the analysis of its current situation, we will also take into account other news that may have an important influence on the evolution of its share price on the stock market, such as :

  • Data from the competition and from its sector of activity in general, including the evolution of the market shares of the various players, the strength of demand or important publications and communications from some of its opponents.
  • Climatic, political or regulatory events that may have an impact on a company's sales or production and which will of course determine its future profitability.
  • Financial transactions that enable the expansion of a company's activities, such as takeovers or mergers, joint ventures or partnerships set up around the world.
  • The various innovations and new products or services offered by a company that will enable it to reach a wider target of customers or to develop in new segments in order to protect itself more effectively from the risk associated with a single sector.
  • The dependence of a company on its suppliers or on the price of the raw materials it needs for its business activities or the exchange rate of its currency with the currencies in which it pays its suppliers or sells its products and services for export.

On our site, you will find detailed information for each major listed company to further facilitate your research and make this fundamental analysis more effective.

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