Question

In: Finance

How can fundamental analysts trade on the basis of an accounting analysis?

How can fundamental analysts trade on the basis of an accounting analysis?

Solutions

Expert Solution

Fundamental analysts will be trading based upon the accounting information when they will feel there is a undervaluation or overvaluation of stocks according to their analysis which is based upon the books of the accounts.

When there would be an analysis of intrinsic value of stocks which will be based upon the various fundamental of the company, which have been derived after proper analysis of the books of accounts containing all the accounting informations about the company then these analyst will be arriving at intrinsic value which will either be higher than price and lower than price, so they will be trying to capitalise upon the difference on those stocks and they would be trying to invest accordingly into the stocks after studying the appropriate economic cycle and they would be trying to gain through the differentiation of price and value of the stocks.

For example it can be said that if Amazon is trading at 2500 and if an analyst find that according to the intrinsic valuation of the share the Amazon should have been trading at 2200 then he should be taking the short position based upon his fundamental analysis according to the time horizon, he will be trading on those accounting informations to gain through the differentiation of value and price and trying to capitalise upon it.

This type of value based approach by various fundamental analysis helps in trading of these stocks based upon the accounting informations and it will help them to gain profits in the shorter period or the medium term period based upon the fluctuation of the economic cycles.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

What is the basis for trade (absolute or comparative advantage)? How can an individual or a...
What is the basis for trade (absolute or comparative advantage)? How can an individual or a country gain from specialization and trade (please use an example).
Explain how a company can be reporting accounting profits but financial analysts could conclude that management...
Explain how a company can be reporting accounting profits but financial analysts could conclude that management is not adding economic value—in fact is reducing the value of the company. What would that imply about the firm’s IRR and ROE?
1. How can currency value create a trade barrier? Explain the basis for this claim that...
1. How can currency value create a trade barrier? Explain the basis for this claim that China is a currency manipulator. What is the effect of the currency value on Chinese firms and on American firms? What would be China’s motivation for such manipulation? From the U.S. point of view, how should the currency value change and for what purposes? 2. Is Germany a currency manipulator, as suggested in the NPR story? Should the U.S. treat Germany the same as...
Which of the following is correct about accrual-basis accounting and cash-basis accounting? a. Managers can manipulate...
Which of the following is correct about accrual-basis accounting and cash-basis accounting? a. Managers can manipulate accruals downward to inflate the firm's net income. b. If the net income is calculated at the end of a company's economic life, i.e. after the business is wrapped up and liquidated, then the net income calculated using cash-basis accounting is greater than that using accrual-basis accounting. c. Under accrual-basis accounting, expense is recognized in the same period as the revenue it relates to...
A) How to use PPP for fundamental analysis? B)Why can current spot rate be used to...
A) How to use PPP for fundamental analysis? B)Why can current spot rate be used to forecast the spot rate in the future?
Technical analysis Vs Fundamental Analysis Which analysis is useful, technical analysis or fundamental analysis? None of...
Technical analysis Vs Fundamental Analysis Which analysis is useful, technical analysis or fundamental analysis? None of them, one of them, or both of them? From my experience, I feel technical analysis is at least as important as fundamental analysis, yet our textbook only has a very simple and unapplicable introduction on technical analysis. Technical analysis is very useful in helping one entry in or exit out a position, one will be more successful if he/she can combine both technical and...
(i) Explain using graphical analysis the terms-of-trade argument against free trade. (ii) On the basis of...
(i) Explain using graphical analysis the terms-of-trade argument against free trade. (ii) On the basis of your answer in item (i), please comment on the following statement using the evidence discussed in class about the effects of the 2018 waves of tariffs applied by the U.S. government: President Trump via twitter on 11/29/2018: “Billions of Dollars are pouring into the coffers of the U.S.A. because of the Tariffs being charged to China, and there is a long way to go....
(i) Explain using graphical analysis the terms-of-trade argument against free trade. (ii) On the basis of...
(i) Explain using graphical analysis the terms-of-trade argument against free trade. (ii) On the basis of your answer in item (i), please comment on the following statement using the evidence discussed in class about the effects of the 2018 waves of tariffs applied by the U.S. government: President Trump via twitter on 11/29/2018: “Billions of Dollars are pouring into the coffers of the U.S.A. because of the Tariffs being charged to China, and there is a long way to go....
The Relative Importance of Factors of Fundamental Analysis Fundamental analysis is the process that aims to...
The Relative Importance of Factors of Fundamental Analysis Fundamental analysis is the process that aims to develop an understanding of the determinants of a company’s value based on the performance of the economy, the company’s industry and the business performance of the company itself. Fundamental analysis considers factors such as: the level and growth rate of the GDP, the evolution of interest rates, the government’s fiscal and monetary policies, the industry’s lifecycle, the financial metrics of competitors’ performance, the company’s...
Cash Basis vs. Accrual Basis Accounting Differentiate between cash-basis accounting and accrual-basis accounting. Why is accrual-basis...
Cash Basis vs. Accrual Basis Accounting Differentiate between cash-basis accounting and accrual-basis accounting. Why is accrual-basis accounting the preferred method for most businesses? The Internal Revenue Service requires all companies with sales over $5,000,000 to use the accrual-basis of accounting for income tax reporting purposes. Why?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT