What is Fundamental Analysis?
Fundamental analysis is a fundamental method used in financial markets. It allows investors to examine and analyze a company or industry’s basic and economic factors to make sound investment decisions. This method focuses on factors like income, profitability, industry growth, competitive position, management, macroeconomic situation, government policies, and other relevant aspects.
Through fundamental analysis, investors can meticulously evaluate a company’s or industry’s financial performance to comprehend the risks and opportunities associated with investing in them. This approach not only helps investors identify exceptional and high-performing companies but also provides a thorough understanding of the macroeconomic environment and the factors influencing their investment returns.
In this article, we will discuss the principles and methods of fundamental analysis, its importance in the investment decision-making process, and how to implement a comprehensive and accurate fundamental analysis. We will also examine and explain some of the tools and methods used in it, such as financial ratios, profit and loss reports, and industrial achievements. Please stay with us until the end of this article.
Fundamental analysis is a method used to assess the value and performance of a company or stock in the financial markets. This approach involves reviewing and analyzing the basic and economic factors related to the company or industry in question.
Factors that are examined in fundamental analysis include
• Income and profitability: Examining the company’s income and profitability is an important way to gauge its financial performance.
• Policies and management: evaluating the company’s management policies and its management quality.
• Competition and marketing position: analysis of the company’s competitive position in the market and its future growth and development capabilities.
• Economic and industrial factors: examining macroeconomic factors and industry trends related to the company.
• Profitability and value of the company: evaluation of the company’s value and estimation of the stock value based on the analysis of the process and the factors mentioned above.
Fundamental analysis is crucial for investors as it enables them to make investment decisions based on a comprehensive understanding of the actual performance and value of companies and industries, rather than relying on short-term market impulses or rumors. This analytical method helps investors reduce their risks and identify more favorable investment opportunities.
What is intrinsic value?
Intrinsic value refers to the true value of an asset or investment, determined based on its fundamental characteristics and factors, without considering market factors or short-term trends.
When it comes to stocks, intrinsic value is the amount calculated through it and analysis based on the financial and economic information of the company. This value may differ from the market price, which is the price at which shares are forex traded in the market.
When calculating the intrinsic value of stocks, various methods are typically used, including stock value models, future profit estimation, and valuation theories. These methods determine intrinsic value based on factors such as a company’s revenue, profitability, risk, growth, and liquidity.
In general, if an asset’s intrinsic value is greater than its market price, it may be considered a favorable investment opportunity. But if the intrinsic value is lower than the market price, this may indicate a bullish investment.
Steps for conducting fundamental analysis of a cryptocurrency
Fundamental analysis of a Crypto currency, like any other asset, requires examining fundamental factors to determine its true value. In the following section, we will outline the steps involved in conducting fundamental analysis of a cryptocurrency:
• Overview of the underlying technology: Cryptocurrencies are typically built on blockchain technology. Therefore, the intrinsic value of a Crypto currency can be heavily influenced by the technology it utilizes. Examining the potential evolution of the currency’s blockchain technology and its response to existing technical challenges is a crucial initial step in it.
• Examining consumption and applications: One crucial factor influencing the value of a Crypto currency is its real-world applications and usage. Examining whether a Crypto currency is utilized for daily transactions or as a medium of exchange can provide insights into its actual value.
• Analysis of the development team: The development team is the fundamental support for any Crypto currency. Evaluating the experience and expertise of team members, technical analysis, and their execution ability are some of the factors that impact the value of a Crypto currency.
• Examining market conditions and analyzing competitors: It is essential to analyze the market and competitors in order to gain a better understanding of the positioning of a Crypto currency in the market and to assess its competitive advantage.
• Legal and Regulatory Review: Legal and regulatory factors can significantly impact the development of Crypto currency. Examining financial regulations, anti-money laundering laws, and cryptocurrency regulations can aid in cryptocurrency fundamental analysis.
Advantages of Fundamental Analysis
Fundamental analysis, one of the two main analytical methods in financial markets, offers several advantages that can be very useful for investors. Below are some of the benefits of it:
• Deep understanding of true value: Fundamental analysis enables investors to evaluate the true value of an asset or company by analyzing fundamental factors, helping them understand the actual trend of changes in asset values and make investment decisions accordingly.
• Long-term return: Fundamental analysis involves evaluating stable factors of asset value to make investment decisions, leading to more stable and long-term returns.
• Risk Reduction: Analyzing the fundamental factors associated with an asset or company can help investors reduce the risks management of investing in them. For instance, examining the financial performance and analysis of a company can provide investors with essential information to identify any financial or management problems and avoid investing in such companies.
• Identify Opportunities: Fundamental analysis assists investors in identifying investment opportunities in valuable assets or companies. By examining factors such as revenue, profitability, industry growth, and competitive position, investors can find assets or companies that are likely to grow organically.
Disadvantages of Fundamental Analysis
In this section, I will outline some of the drawbacks of fundamental analysis:
• Time-consuming: Fundamental analysis requires extensive time and meticulous research, which many investors find unacceptable due to the lengthy process.
• Complexity: Fundamental analysis can be challenging due to the complexity of factors and variables that need consideration. For instance, assessing financial information, industry performance, and management can be a complex and time-consuming process.
• Dependence on data: Fundamental analysis relies on accurate and consistent data and fundamental information. Inaccurate or inconsistent information can impact investment decisions.
• Unforeseeable effects: Economic, political, and social factors can impact fundamental analysis. Sudden changes in these factors may make it ineffective or even reverse its conclusions.
• Inefficiencies in emerging markets: In markets that are still in the early stages of development, there may not be sufficient information about companies or assets, making fundamental analysis ineffective or even impossible.
• Short-term volatility: Fundamental analysis primarily considers long-term and stable changes in asset value, making it less responsive to short-term fluctuations in the market.
Learning about fundamental analysis
Learning fundamental analysis can assist you in making informed investment decisions. Here are steps to start learning it for investing in financial markets:
• Basic Concepts: Begin to grasp the fundamental concepts of fundamental analysis, such as earnings, profitability, liquidity, growth, and other factors related to a company’s financial performance.
• Studying reliable sources: Read books, articles, and reliable educational sources on fundamental analysis. Resources such as “Value Analysis” by Ashraf Moradi and “Fundamental Stock Analysis” by Iran Pirouzi can be helpful.
• Introduction to Tools and Methods: Familiarity with fundamental analysis tools and methods, such as financial ratios, valuation models, and advanced financial analysis techniques is required.
• Study financial reports: Start reviewing and analyzing the financial reports of companies. Understanding elements such as the income statement, balance sheet, and cash flow can enhance your comprehension of a company’s financial performance.
• Analyzing companies and industries: Practice making your own assessments and investment decisions based on thorough analysis of various companies and industries.
• Practice and experience: Doing more fundamental analysis and practicing analyzing companies and assets will help you improve your skills and increase your investment returns.
• Participating in investment communities: Membership in investment and fundamental analysis-related communities and forums allows you to engage in discussions and exchange experiences with other investors.
A final word about fundamental analysis
Fundamental analysis demonstrates that in the ever-changing realm of investments, the true worth of an asset or company is determined by fundamental values and economic laws. This method enables investors to make decisions based on trustworthy information and more precise analysis, leading to more sustainable and productive investments in the long run.
