What is fundamental analysis?

The study of the fundamentals of the stock market is a method to predict market trends based on financial information published by companies or projections m...

GLOSSARY

LIDERBOT

2/4/20242 min read


The study of the fundamentals of the stock market is a method to predict market trends based on financial information published by companies or projections made by agencies or analytical firms. This approach compares such data with the current price of the company's stock, ensuring that the information is uniform and comparable with that of other companies to facilitate the selection of optimal investments.

A commonly used indicator is the Price/Earnings (P/E) Ratio, which measures the relationship between the stock price and earnings per share, providing a measure of a company's profitability relative to its market price. A higher P/E suggests greater profitability. Fundamental analysis generally uses two main strategies to determine a company's target value: the Top-Down approach and the Bottom-Up approach.

chart trading
chart trading

In the Top-Down approach, the global economic environment is first examined before making investment decisions and building investment portfolios, gradually refining the analysis until focusing on a specific company. This methodology begins by identifying global economic phases and then defining appropriate investment strategies. Subsequently, economies and sectors that align with these strategies are selected before choosing specific investments.

chart trading
chart trading

On the other hand, the Bottom-Up approach focuses on the fundamental aspects of the company, such as its debt level, expenses, growth, and revenue. Although this method does not ignore the macroeconomic context, it gives preference to the detailed analysis of individual companies as a source of investment opportunities. Portfolio construction decisions are based on individual analyses rather than on general market considerations.

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