Fundamental analysis of a business involves analyzing its financial statements and health， its management and competitive advantages， and its competitors and The term is used to distinguish such analysis from other types of investment analysis， such as quantitative analysis and technical Fundamental analysis is performed on historical and present data， but with the goal of making financial There are several possible objectives: * to conduct a company stock valuation and predict its probable price evolution， * to make projection on its business performance， * to evaluate its management and make internal business decisions， * to calculate its credit Two analytical modelsWhen the objective of the analysis is to determine what stock to buy and at what price， there are two basic Fundamental analysis maintains that markets may misprice a security in the short run but that the "correct" price will eventually be Profits can be made by trading the mispriced security and then waiting for the market to recognize its "mistake" and reprice the Technical analysis maintains that all information is reflected already in the stock price， so fundamental analysis is a waste of Trends 'are your friend' and sentiment changes predate and predict trend Investors' emotional responses to price movements lead to recognizable price chart Technical analysis does not care what the 'value' of a stock Their price predictions are only extrapolations from historical price Investors can use both these different but somewhat complementary methods for stock Many fundamental investors use technicals for deciding entry and exit Many technical investors use fundamentals to limit their universe of possible stock to 'good' The choice of stock analysis is determined by the investor's belief in the different paradigms for "how the stock market works" See the discussions at efficient market hypothesis， random walk hypothesis， Capital Asset Pricing Model， Fed model Theory of Equity Valuation， Market-based valuation， and Behavioral Use by different portfolio stylesInvestors may use fundamental analysis within different portfolio management * Buy and hold investors believe that latching onto good businesses allows the investor's asset to grow with the Fundamental analysis lets them find 'good' companies， so they lower their risk and probability of wipe- * Managers may use fundamental analysis to correctly value 'good' and 'bad' Even 'bad' companies' stock goes up and down， creating opportunities for * Contrarian investors distinguish "in the short run， the market is a voting machine， not a weighing machine"[1] Fundamental analysis allows you to make your own decision on value， and ignore the * Value investors restrict their attention to under-valued companies， believing that 'it's hard to fall out of a ditch' The value comes from fundamental * Managers may use fundamental analysis to determine future growth rates for buying high priced growth * Managers may also include fundamental factors along with technical factors into computer models (quantitative analysis)Top-down and Bottom-upInvestors can use either a top-down or bottom-up * The top-down investor starts his analysis with global economics， including both international and national economic indicators， such as GDP growth rates， inflation， interest rates， exchange rates， productivity， and energy He narrows his search down to regional/industry analysis of total sales， price levels， the effects of competing products， foreign competition， and entry or exit from the Only then does he narrow his search to the best business in that * The bottom-up investor starts with specific businesses， regardless of their industry/ProceduresThe analysis of a business' health starts with financial statement analysis that includes It looks at dividends paid， operating cash flow， new equity issues and capital The earnings estimates and growth rate projections published widely by Thomson Financial and others can be considered either 'fundamental' (they are facts) or 'technical' (they are investor sentiment) based on your perception of their The determined growth rates (of income and cash) and risk levels (to determine the discount rate) are used in various valuation The foremost is the discounted cash flow model， which calculates the present value of the future * dividends received by the investor， along with the eventual sale (Gordon model) * earnings of the company， or * cash flows of the The simple model commonly used is the Price/Earnings Implicit in this model of a perpetual annuity (Time value of money) is that the 'flip' of the P/E is the discount rate appropriate to the risk of the The multiple accepted is adjusted for expected growth (that is not built into the model)Growth estimates are incorporated into the PEG ratio but the math does not hold up to [neutrality disputed] Its validity depends on the length of time you think the growth will Computer modelling of stock prices has now replaced much of the subjective interpretation of fundamental data (along with technical data) in the Since about year 2000， with the power of computers to crunch vast quantities of data， a new career has been At some funds (called Quant Funds) the manager's decisions have been replaced by proprietary mathematical [2]Criticisms * Some economists such as Burton Malkiel suggest that neither fundamental analysis nor technical analysis is useful in outperforming the markets[3]
