Fundamental Analysis is a way to evaluate the value of a company based on key financial metrics to find it’s intrinsic value as way to see if it is overvalued or undervalued.
This method is more suitable for investors who are not concerned with the day-to-day price action of the stock and are rather focusing their efforts on a longer term investment based on their research findings.
Fundamental analysis looks at all factors that could impact the value of a company from macroeconomics, economic policies, competitors, and the companies financial health to name a few.
Investors and analysts use this method as a way to find value for the company that can be compared to the actual price the company is trading at.
If the value they come up with is more than the current share price then it is safe to assume that stock is under valued and could return value to its investors. Investors will usually look for a company to be undervalued by a specific amount like 10% before considering to invest in the company.
There are research firms that specialize in different industries as well as long/short bias positions. For example, Muddy Waters Research that focuses on finding big shorting opportunities by looking deep into companies and finding flaws that other investors may be overlooking.
This has given them an edge to trade against and has allowed them to gain a large following that follows their advice.
Warrior Trading Pro Tip
Fundamental Analysis generally doesn’t have much of an impact on active day traders but there can be ways to trade unexpected fundamental changes in a company.
Instances like when a CEO unexpectedly leaves the company or they have a major call-back on a product can create major price movements that active traders can take advantage.
It seems to create the biggest price movements when the news is dropped during market hours and it is unexpected. The market doesn’t like surprises so when they do come it is usually over exaggerated in the stock price causing for some great scalping opportunities.