Fundamental analysis is a set of methods that allow you to predict events in the market or in its segments under the influence of external factors and events. Accurate prediction of changes in market conditions allows the player to make the right decisions in order to maximize the benefits of such fluctuations. Fluctuations caused by events affecting politics and economics at the macro level are studied by fundamental analysis.
A successful player in the currency and stock markets, as a rule, conducts a deep technical and fundamental analysis of macroeconomic indicators that affect their development. The deeper the study of the fundamental components of the market, the lower the risks of participants. The main applied task of the analysis is to determine the most attractive investment areas.
news
News influencing the market can be divided into:
- economic;
- political;
- rumors and expectations;
- Force Majeure.
In turn, economic and political news can be divided into expected and unexpected events. Expected news include announced news that are recorded in the economic calendar.
Validity
The impact of news and events on the market may have a different time period, but the market reacts to any news almost instantly, revising price ratios, and in the future, the events that occur can only support current trends. Therefore, market speculation on the news is possible only in a short time period, until the market again finds a stable position.
Economic calendar
Given the fact that most economic news has pre-known release dates, market traders put them on a special calendar. It introduces an element of order into the essentially chaotic market, allows you to prepare for the event and give it a preliminary assessment. The dates are entered in the economic calendar:
- publication of statistical reporting by states;
- financial statements of the largest players in the market;
- the entry into force of adopted laws that change the conditions for doing business;
- speeches of leaders of states, heads of national banks and large financial organizations;
- other events announced that may affect the market situation.
Initial conditions for analysis
A simple fundamental analysis of the market can, to a first approximation, in a short time period proceed from the assumption that, in the absence of news, the market is stable and its general trends remain. Therefore, the main factors influencing the occurrence of fluctuations and, accordingly, obtaining speculative profit from these fluctuations are news (events). Moreover, the more unexpected the news and event, the greater the market fluctuation they can cause. Each businessman, conducting a fundamental analysis of the market, wants to avoid risks and losses and is interested in additional profit from fluctuations.
Economic forces
In order to conduct a fundamental analysis, study factors that indicate the general condition of the economy, such as:
- trends in GDP - with the growth of GDP, the national currency and assets in the state strengthen;
- the country's budget, the planned and actual size of its surplus or deficit;
- balance of payments and trade; export to import ratio;
- consumer and wholesale price indices, inflation rate;
- unemployment data;
- indices of industrial production and stocks, other indicators of the state of the economy.
There are dozens of different indices and indicators of the state of macroeconomics. For players on the market, all the signals generated by the change in these indices carry important information, having studied which, you can correctly determine your behavior strategy in order to avoid losses and profit.
Economic news, as a rule, is expected - analysts even before they appear try to predict the magnitude of the indices and indicators. Only in the case of a strong deviation of the actual values from the forecasts does the market experience significant changes.
Political factors
Fundamental analysis considers the change of government, election results, statements by state leaders, adoption of laws and other political news from the point of view of economic impact and predicts market changes caused by these events. The conclusion of interstate agreements, non-market regulation of the economy can have a significant impact on the overall economic climate in the state and in countries that are its main strategic partners.
Political news includes strikes, armed conflicts, changes in the political system, and other events. Their impact on the economy can have various consequences. Although, as a rule, major political upheaval alarms investors and entails negative results for the economy as a whole. A political crisis is usually accompanied by an economic downturn and vice versa.
Rumors affecting expectations
Rumors may have a significant impact on market players. It is the expectations of people seeking to maximize profits that can increase investment in a particular sector of the economy or in a particular company. Moreover, such expectations lead to a change in the structure of the market. Risks of participants playing on rumors are very high, but if the rates were correct, then the profit on such investments is high.
Force Majeure
Major natural disasters, which led to the destruction of industrial enterprises, communications and other infrastructure, bring about changes in the economic situation in the disaster region. Man-made disasters can change the investment climate of an individual company and the industry as a whole. Fundamental analysis allows you to identify trends in the economy under the influence of such unexpected factors. It is used not only to study the market as a whole, but also for specific investment areas. You can analyze the situation at the enterprise, in the industry, a certain segment of the market. The most developed applied areas are those that will be discussed below.
Fundamental analysis of the foreign exchange market
News and events in the economy often significantly affect national currencies. Studying the impact of events, fundamental analysis of monetary the market The goal is to predict the strengthening or weakening of national currencies in trading pairs. If the same news has a positive effect on the first currency of the pair and negative on the second, then it is obvious that the first currency is strengthening against the second. An important factor in the foreign exchange market is the discount rates of national banks, especially economically strong states.
A fundamental analysis of financial markets and changes in exchange rates reflects the numerous processes taking place in the global economy, and allows us to predict the movement of prices to achieve maximum profits in an ever-changing world of trade. It is important to take into account the cyclical development of the economy.
In periods of recession, when production is curtailed, interest rates fall, consumer demand decreases, unemployment rises, and the national currency loses its attractiveness. Foreign exchange investors will try to keep their savings in a more stable currency. But it must be remembered that periods of recession are replaced by stagnation and growth, it is then that the players in the foreign exchange market get their profits.
A fundamental analysis of the foreign exchange market in the short-term situation and the forecast for its development uses elements of technical analysis. Flat (stagnant) state is not interesting for players of currency exchanges. Fundamental and technical analysis is based on the use of mathematical modeling. For it, methods of mathematical data processing and their approximation are involved.
Fundamental Stock Market Analysis
Trading stocks as well as other securities requires in-depth study. Fundamental analysis of the securities market is based on the same signals as the entire economy. However, in this case, industry specifics play a significant role, because for many industries the same signals can have multidirectional effects.
Fundamental analysis of the stock market requires a deep understanding of the occurring phenomena, both at the macro and micro levels. So, for example, the difficulties encountered for the sale of specific goods can lead to an increase in the sale of goods that replace them, and shift the focus of investors in the stock market.
Fundamental Stock Analysis enterprises is based on a deep study of the current economic situation, the prospects for development of the industry. He must take into account the financial condition of the enterprise, its balance of payments, personnel potential.
Fundamental analysis of securities requires the highest qualification from the trader, intuitive instinct for a change in the market. Having studied these factors, investors make decisions on the acquisition or sale of shares in the stock market. Only fundamental stock analysis Market allows you to count on the right decisions for the investor to make a profit.
Intermarket analysis
An important condition for the correct analytical conclusions is an understanding of the close relationship of different markets and their segments. Trends that have arisen in any market or in its segment, without fail lead to a general fluctuation. The magnitude of such fluctuations is associated with the importance and integration of this part of the market in the general processes of the economy.
At the same time, private and general trends may not coincide - growth in one sector of the economy can lead to a recession in other sectors and adversely affect the economy as a whole. For example, a fall in energy prices does not unambiguously affect individual sectors of the economy and the economy of states.
In such a situation, despite the decline in the energy-producing industries and the industries related to their provision, there may be an increase in consumers of this resource. And only if the share of energy production in the state economy is large, it can lead to significant difficulties in the general situation in the country's markets, causing a decrease in consumer demand and solvency at all levels. Thus, the same events in different market sectors can lead to far from straightforward consequences.
Difficulty analysis
Fundamental analysis is based on events that affect economic processes, but when analyzing the market, one must be fully aware of the fact that all participants create market prices, and their formation is subject to many subjective factors, which can be quite unexpected from the point of view of analysis standards. After all, each player in the market individually evaluates the news received, and only the totality of decisions of all players finally forms the balance of supply and demand and, accordingly, the price.
All market participants, even before the event, on the basis of rumors, their experience, expert opinions are preparing for a change and, in accordance with their expectations, change quotes in advance. Individual players react differently to the same news, sometimes taking opposite decisions - this leads to the fact that even very significant news sometimes does not cause significant changes in quotes and prices. Such an analysis is very time-consuming, as it must take into account the reaction of all market players to the news. We can assume that fundamental analysis is a discipline that studies the collective consciousness of market players.
Correct Signal Evaluation
Stock indices and indices of indicators of the state of the economy are integrated and reflect only general trends in the economy and the market. For a detailed analysis and decision-making, you need to study all the circumstances that may affect the results. It is not for nothing that people who profit from transactions on the exchange are called players, because ultimately luck, talent and the ability to correctly evaluate those market signals that are studied by fundamental analysis play a significant role in their work (or even in the art of exchange trading).