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

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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 1 year ago

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