Fundamental analysis determines the value of a security by analyzing the financial strength of its issuing company.
All the information fundamental analysts need to analyze a stock can be found in a company's financial statements.
What is intrinsic value?
Fundamental analysts use this company information to determine a security's intrinsic value. Intrinsic value is the value of a security independent of its market price.
Fundamental analysis is based on the belief that a security's market price moves toward its intrinsic value. When the stock's intrinsic value is higher than its market price, the fundamental analyst buys it; when it is below, the analyst sells it.
Using fundamental analysis to determine whether to buy or sell a security is a complex process. The analyst first looks at the overall health of the economy and trends in interest rates. Next, the analyst examines a company's entire industry before moving on to evaluating the company itself.
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