Fundamental analysis

When internet trading has occurred, the world of exchange trading widely opened its doors. A new type of activity attracted millions of people who wanted to try their hand in this field — advertising promising profits without example became the engine for progress. And the process picked up speed- the most popular financial market, Forex, overtakes more than 3 trillion US dollars a day.

Unfortunately, financial market grinds not only currency, but also novice traders who regarded themselves professionals or found new funny activity in trading on financial markets. Those who stayed alive after the first trading experience on real accounts found out that it is impossible to take by storm financial markets and it is better to change the strategy — acquire the knowledge of trading. Numerous army of brokers who definitely interested in the increase of the number of traders immediately backed up novice traders (not only by providing the leverage) by running specialized courses for beginners on the financial markets. Fundamental analysis of Forex and stock market is a classical subject of the study of the exchange trading basis.

What is fundamental analysis

The concept of fundamental analysis of the financial market means collection and processing of information that can affect the value of financial assets: shares, securities or currency. So, it is necessary to know the basis of fundamental analysis both for trading on Forex and on stock markets.

The fundamental analysis is tied up in knowledge of significant economical and political factors. However, it doesn’t require degree in economics. The knowledge that is necessary for the trader-practice has a narrow focus. As a result, graduate from the training courses for traders can understand this information easily. Qualification of the analyst is determined not by the knowledge of the whole list of micro and macroeconomic indicators (you are not going to pass examination in economics), but the ability to see a hidden meaning in these indicators, to understand the general situation and to forecast the future price movement.

It is better to treat with caution academic papers, recommendations of theoretical traders. They maybe do not actual perception of the market as for it you have to trade for years.

Main indicators of fundamental analysis

Principals of fundamental analysis base on the study of indicators or basic economic indicators of the country, which have a great impact on the currency value:

• Current interest rate of the Central Banks (in the USA — FRS). For example, when analyzing currency pair EURUSD6 traders focus on the monetary policy of EU Central Bank and FRS;
• GDP. Long-run recession (for more than 6 months) leads to the zero GDP growth. It will negatively cause the value of the national currency;
• Unemployment rate. Basis indicator’s rate for the developed countries stays at 6%. If this rate is higher than 6%, it will lead to the weakening of the national currency;
• Trade balance and balance of payment. Export exceeds import, which means trade surplus (the value of the national currency is rising). The situation when import exceeds export causes trade balance deficit as the country has to purchase more currency to fulfill demand of its importers. The value of the national currency decreases;
• Inflation and its forecast;
• Labour efficiency;
• Real estate market situation;
• Business activity index;
• Prices for gold and oil;
• Oil reserves.

There are other indicators that can correct results of fundamental analysis:

• consumer price index;
• retail trade;
• factory order;
• construction of new buildings and other indices that are published in economic calendar, for example, broker’s website.

Methods of fundamental analysis

Accurate fundamental analysis requires an integrated approach. Main methods that are used for analyzing financial markets:

Comparison. This method requires comparison of universal economic indicators that can be used for evaluation in different countries. Typically, the key interest rate and GDP are taken into account.

Generalization. Currencies are grouped into distinctive blocks. Indexes are calculated under these blocks.

Correlation. Various factors influence currency quotes. If the degree of dependence of a financial asset on the change of some factors is determined, it is more likely to determine the future direction of price movement.

Deduction, induction. Induction method means the generalization of a number of factors to find out general revealing patterns. Deduction helps to determine the cause-and-effect relationship of current events.

Seasonality. Seasons influence the value of companies assets. In practice, only those companies that are connected to the agricultural products, energy, food. As a consequence, there are fluctuations in the value of the national currency.

Macroeconomic analysis. It is used to determine the price of shares. The dynamics of the economic state of a single country or of the world economy are analyzed.

Industry analysis. This method is used to clarify the macroeconomic analysis, specifying the direction of investment.

Fundamental analysis of securities

Fundamental analysis of the securities market is used to forecast shares’ price and the value of the company itself. Analysis focuses on the following indicators:

• overall volume of trade;
• net profit;
• capitalization;
• assets;
• debt and other obligations;
• PE, PS (rate of price to profit. Low level of this indicator means undervaluation of the company, high level — revaluation);
• EBITDA (earnings before interest, tax, depreciation and amortization)

Fundamental analysis of shares as exemplified by «RUSAGRO» shares

This company is one of the largest agricultural holding in the Russia. It reflects a rapid growth in profits in the consumption segment (one of the best indicators in the world). Dividend yield is about 11.55% per year. Actually, it is very high. At the moment (2017) the company belongs to the category of undervalued. The company’s revenue is growing from year to year and the level of the debt obligations remains low. The current share price is 800 rubles. According to analysts forecast, target price level is at1250 Rub.

Advantages and disadvantages of fundamental analysis

Fundamental analysis of Forex and securities market is considered to be more complicated than analysis based on graphical constructions that is used in technical analysis. Statistics provide the following data — 80% against 20% in favor of supporters of technical analysis.

Attractive features of fundamental analysis and its key strength:

• it is beyond the competition for long-term investments;
• helps to find profitable financial assets;
• develops business intelligence (one of the most important qualities of the analyst).

Disadvantages of this method include:

• requires a lot of time;
• individual approach in the analysis of different sectors of the economy, companies, etc is required. Universalism does not give accurate estimates.
• subjectivism in estimation of current events;

Professional traders rely only on the results of a comprehensive research. It includes fundamental and technical analysis of financial assets.

Books on fundamental analysis:

• K. Sidney «Graham and Dodd’s Security Analysis»
• A. Kiyanitsa «Fundamental Analysis of Financial Markets»
• K. Tsarihin « Fundamental analysis»

Technical and fundamental analysis of the stock market and Forex opens the way for traders to conscious trading on any stock exchanges, so they doesn’t blindly copy the recommendations of home-grown analysts.