Fundamental AnalysisFA
Fundamental analysis estimates what an asset is worth from underlying data — company results, the economy, interest rates — rather than from price charts alone.
Technical analysis asks what price is doing; fundamental analysis asks what the asset is worth and why. For a company, that means revenue, profits, debt and growth prospects. For a currency or a market, it means inflation, interest rates and economic growth. Most traders use some of both. This entry explains the main parts of fundamental analysis, how it differs from technical analysis, and how short-term traders use it.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 4 min
- Also called
- Fundamentals, Fundamental analyst, Valuation analysis
- Updated
Fundamental analysis in plain words
Before buying a house, you look at its condition, location and the rent it could earn — not only at what similar houses sold for last month. Fundamental analysis does the same for shares and other assets.
If the analysis says a share is worth more than its price, it may be undervalued; if less, overvalued.1 Prices can stay away from that estimate for a long time. See Price-to-Earnings Ratio.
How fundamental analysis works, step by step
Understand the business or economy
What does the company sell, or what drives the currency?
Read the numbers
Revenue, profits, cash flow and debt.2 See Earnings and Free Cash Flow.
Check the big picture
Interest rates, inflation and growth affect every asset. See Interest Rate and Inflation.
Estimate value
Use ratios such as price-to-earnings or a cash-flow model.
Compare value with price
Decide whether the market already prices in the story.
Time it with price
Many traders use charts to time entries and exits. See Support and Resistance.
Worked examples
Example 1 — A simple valuation check
ValuationA company earns $5 per share. Similar companies trade at 15× earnings. Its share price is $60.
| Peer-based value | 15 × $5 = $75 |
| Price | $60 |
| Gap | Price 20% below peer value |
This suggests possible undervaluation — or the market may expect earnings to fall.
Example 2 — Macro view on a currency
MacroCountry A’s central bank is expected to raise rates while country B’s cuts.
| Rate gap | Widening in A’s favour |
| Fundamental bias | Currency A stronger vs. B |
Currency traders build a directional view from rate and growth differences.
Example 3 — Right analysis, wrong timing
TimingAn analyst correctly judges a share to be overvalued and shorts it. The price rises another 40% before falling.
| Analysis | Eventually correct |
| Interim loss | Large |
Value can take a long time to matter. Combine analysis with risk control. See Stop Loss.
Fundamental vs. technical analysis
| Aspect | Fundamental | Technical |
|---|---|---|
| Question | What is it worth? | What is price doing? |
| Data | Financial reports, economic data | Price and volume |
| Typical horizon | Months to years | Minutes to months |
| Main weakness | Timing | Ignores why prices move |
How traders use fundamentals
Long-term investing
Choosing businesses to own for years. See Position Trading.
Event trading
Trading earnings and economic releases. See Economic Calendar.
Directional bias
Trading in the direction fundamentals favour, timed with charts.
Avoiding traps
Checking the balance sheet before trusting a chart pattern.
Advantages and disadvantages
Advantages
- Explains why prices move over the long run.
- Helps avoid owning fragile or overpriced assets.
- Works across stocks, currencies and commodities.
Disadvantages
- Poor at timing entries and exits.
- Estimates depend on assumptions about the future.
- Markets can ignore value for long periods.
- Requires time and reliable data.
Going deeper
Read as far as you need. Each level builds on the one before it.
Top-down and bottom-up
Beginner
Top-down starts from the economy and works down to sectors and companies. Bottom-up starts from individual companies.
Quality, not only cheapness
Intermediate
A low price-to-earnings ratio can signal a bargain or a business in decline. Look at debt, cash flow and returns on capital too. See Return on Equity and Return on Assets.
Discounted cash flow
Advanced
A discounted cash flow model values a business as the present value of its expected future cash flows. Small changes in growth or discount-rate assumptions can change the result a lot. See Free Cash Flow.
Common mistakes
Confusing a good company with a good price
Excellent businesses can be overpriced.
Ignoring timing
Being right too early can be costly.
Trusting one ratio
Use several measures together.
Forgetting the macro picture
Rates and growth affect every valuation.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Fundamental analysis estimates value from underlying data.
- For companies: revenue, profits, cash flow and debt.
- For markets: rates, inflation and growth.
- It explains the long run but is weak at timing.
- Many traders combine it with technical analysis.
Frequently asked questions
Is fundamental or technical analysis better?
Can fundamental analysis be used for crypto?
Do day traders use fundamentals?
Further learning
- Earnings
The most important company report.
- Interest Rate
The macro variable behind most valuations.
- Market Capitalisation
How a company’s value is measured in the market.
- Trend
The technical side used for timing.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Investor.gov (SEC). Price-Earnings (P/E) Ratio (glossary) (opens in a new tab) Checked .
- Investor.gov (SEC). Earnings Per Share (glossary) (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.