Question

In: Finance

What are the key reasons for using fundamental analysis?

What are the key reasons for using fundamental analysis?

Solutions

Expert Solution

When buying anything, people like to believe that they are paying a fair price for the value they are receiving. Fundamental analysis offers traders the potential to determine or least to estimate the relative value of a given company to its current stock price. Fundamental analysis can also compare the relative value of one company to that of another company or group of companies in order to refine their search to the best opportunities available.

KEY REASONS TO USE FUNDAMENTAL ANALYSIS

Traders typically rely on fundamental analysis to do several things.

  • identify companies that poses superior growth and value characteristics
  • to reduce emotional decision making- rather than relying on "gut feelings"
  • traders can look for potential buy/sell signals that are generated based on specific and objective criteria
  • To identify and confirm buy and sell signals generated from other forms of analysis such as technical analysis.
  • A trader can also work in opposite direction and use fundamental criteria to first identify a list of companies that possess superior growth or value characteristics, and then apply some technical analysis tools to that list of stocks to find buying opportunities.
  • To use it to identify companies that are performing well as a business enterprise in the belief that their share price will perform well over time as a result.
  • short term traders tend to use technical analysis while longer term investors often prefer to use fundamental analysis.

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