Fundamental analysis

This is Psi Markets’ guide to fundamental analysis. Use it to understand how information that is freely available can help you make better decisions about where to invest your money, as well as when to enter and exit a market.

What are fundamental analyses?

Fundamental analysis is a broad term. It encompasses macro-scale information such as the state of an economy, market sentiment, and the position held by an industry. Microeconomic factors that pertain to a specific company, such as its earnings report, its market share, and its accounting management are also included and are equally important.

Together, this data gives analysts an idea about whether a company’s shares are overvalued or undervalued. If it’s the latter, the natural response is to consider selling; if it’s the former, it makes more sense to buy.

While this approach makes sense, fundamental analysis does not provide black and white answers. Many of the considerations that the trader makes, as well as the conclusions that he derives from the data, are subjective. It is entirely possible for two analysts to consider the same information and reach opposite conclusions.

At Psi Markets, we emphasize mathematical models to accurately predict trends in stock markets, Forex and CFDs (Contracts for Difference). Fundamental analysis and technical analysis are central to all financial planning.

Fundamental analysis tools

With this introduction to fundamental analyses, it is now possible to see how complex they can be. However, by calculating them for yourself, you will understand their interrelationships and develop your skills as a trader.

Here are some key factors you should consider when analyzing for yourself.

• Price/Earnings Ratio (P/E ratio) – It is an indicator of the current selling price of a company’s shares compared to its earnings per outstanding share.
• Price/Sales Ratio (P/S ratio) – It is a relationship between a company’s market value and its sales revenue.
• Earnings-to-Price Growth Ratio (PEG) – This is the growth rate of the company’s profits over a year.
• Price/Balance Sheet Ratio (P/B ratio) – It is the comparison of a company’s book value with its market value. A company’s “book value” is its value (cost of assets minus depreciation) as calculated on its financial statement. OP/B is obtained by dividing the last closing price of shares by their book value (from the previous quarter).
• Return on capital – Also called return on equity, this number is obtained by dividing the company’s equity by its shareholders’ equity.
• Dividend Payout Ratio – A company may pay part of its net income profit to shareholders as dividends, while reserving the rest for its future growth. This index compares how much was paid and how much was reserved.
• Dividend yield – This index is obtained by dividing the dividends paid in one year per share to shareholders by the current value of the share. This percentage gives an idea of ​​how much dividend investors can expect to earn when investing in the company.
• Earnings per share – It is calculated by dividing net income, less dividends, by the number of shares in circulation. It gives investors an idea of ​​how the total gain relates to each share outstanding.

There’s no doubt that it’s a lot to take in, especially if you’re a beginner investor. If you are overwhelmed by the number of variables, terminology or calculations, Psi Markets can help.

Tips for fundamental analysis

Good and reliable fundamental analysis takes considerable time and effort. Although much of the information needed for fundamental analysis can be obtained easily, finding the correlation between a financial factor and a stock’s performance can be an intangible objective.

Too often, no single piece of information can provide an accurate and comprehensive picture of a stock’s value. Virtually all the pieces are related and affect each other. To measure whether a stock is overvalued or undervalued, you need to understand these relationships.

To get started, make a list of all the factors to use in your fundamental analysis. They will fall into two categories – macroeconomic and microeconomic – as we mentioned earlier.

Within these two lists, categorize each factor by level and direct impact they will potentially have on the stock’s market value. This is an assessment full of gray areas and your assumptions will affect the final result.

Then evaluate the extent to which each factor affects the others. For example, a thriving economy will boost a company’s profits, as more people will have money to buy the products it offers. On the other hand, if economic growth is happening but starts to slow down, the effect on profits could be downward.

What you should have at the end of your assessment is a web of relationships between all the factors. This is just your starting point of analysis before you start trading.

Advantages and disadvantages

Much of the criticism leveled against fundamental analysis involves its complex calculations and the imprecise way in which factors are related. The assessment of factors is subjective and can vary substantially between different analysts.

Além disso, como qualquer outro dado, a análise de fundamento não pode antecipar elementos atípícos e eventos como a pandemia do COVID-19. Contudo, ela também ignora amplamente a natureza cíclica dos mercados, que é a principal consideração das análises técnicas.

A maior vantagem das análises de fundamento é que elas fornecem uma correlação entre todos os números financeiros e o valor real de mercado de uma ação ou título. Ao considerar os fundamentos que afetam os preços de uma ação, você consegue obter uma ideia mais clara sobre se ela está sobre ou subvalorizada.

A partir daí, investir simplesmente se resume a decidir se você está confortável com a magnitude da diferença entre seu valor atual e seu valor potencial. Naturalmente, muitas avaliações podem colocar diversas empresas em áreas intermediárias.

Lembre-se que isso não significa que sua análise foi inútil. Na verdade, seguir o progresso dessas “ações intermediárias” permitirá que você identifique fatores importantes que você e outros analistas podem ter negligenciado.

Investimentos inteligentes dependem da utilização das informações de modo correto.