what is fundmental analysis

A kind of market analysis that involves studying the economic condition of different countries in order to make the process of currency trade more efficient is known as Fundamental Analysis.

It provides information about economic and political events and their impact, which influence the currency market. Fundamental analysis is one of the most well recognized approaches to the analysis of exchange markets.
Fundamental analysis describes the different techniques of present as well as future valuation. These valuations are made using economic, political and social variables. The fundamental analysis approach is best suited for forecasting the long term changes that take place in the Forex market.
The statements and figures which are a part of the speeches of economists and politicians are called economic announcements by traders and have an immense impact on the moves of currency market. The announcements related to the politics and economy of United States are most important. Certain people such as the Secretary of Treasury, Chairman of U.S. Federal Reserve Bank and the like are some people who are often closely watched by the traders.
Employing strategies of fundamental analysis

In order to employ the various strategies of fundamental analysis, one needs to have basic understanding of demand and supply, which is undoubtedly the principal force behind the financial markets. In case of Forex market, the products that are exchanged are different currencies. The global macroeconomics variations can perpetually have a strong impact on the value of currency as their value depend on the economic wellbeing of the particular country.

As a part of the process of fundamental analysis, economists create economic calendars to predict the different types of economic values and figures in accordance with those of previous months. When the forecast obtained from economic calendars improves from the previous months, the value of US dollars strengthens in comparison to other currencies. On the flip side, when the forecast shows depreciated values, the value of US Dollar goes down. Take for example, the price of oil keeps fluctuating in the global market. If the cost of oil increases, the currencies of countries that are depended on huge amounts of oil import, such as Japan and America, are depreciated in value.

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Fundamental Analysis: Market Indicators (Drivers)

The practice of evaluating the stocks of a company through the comparison of base elements in the balance sheets of a company and the general market factors is known as fundamental analysis.

The most important principle of fundamental analysis is finding profitable companies in which it would be profitable to invest after comparing the management, sales and revenues.
There are basically two kinds of drivers in fundamental analysis. They are:

1. Internal Drivers: The factors which are related directly to the business in question are known as internal drivers. They include assets, liabilities, income, revenue, management, products and the like. The internal drivers help in obtaining a general understanding of the position of the company in comparison to others. The internal driver analysis can be further classified into:
• Management: Companies having a weak management cannot last for a long time. News, Internet, Analyst reports etc. can help one in making an informed judgment about the management of a company.
• Profit: Profit is one of the most important factors for fundamental analysis. This is because companies earning most profit have larger potential for price growth as well as dividends.
• Production: Production is an extremely important factor when we talk about companied producing wood, gas, oil, metal or power. This is because their value depends complete on the production output and the value of the product.
• Share Volume: One needs to check whether the company is question has enough share volume to sell the shares of its stockholders at a later stage.

2. External Drivers: The factors that are outside the influence of a company but can affect its profit margin are known as external drivers. These include inflation, economy, politics, interest rates, bond markets and the like.
• Inflation: Inflation exerts a direct influence on stock market. Though observing inflation rate can prove to be subjective for the trade, knowledge of history can explain the effect of inflation on stock markets in the past. The inflation is ever increasing as individuals and businesses are borrowing rapidly from the market. In this situation, the Federal Reserve intervenes in order to find a solution to the problem. When these control activates, the direction of inflation trend changes. Having control is most important for success on the bull market. Besides this, inflation also has a direct impact on the rate of interest.
• Interest Rates: Interest is of two types namely, short term and long term interest. When the economic growth is strong, the short term rates rise. On the other hand, long term rates ascend depending on the inflation and difference in the currencies of foreign countries.

The federal rate and discount rate are controlled by the Federal Reserve. They are used to manage the trend of inflation as well as the trend of rate of interest. Thus, there rates have an immense impact on all kinds of investors. Also, the ‘real’ interest rate, which is the average of federal funds rate after subtracting the inflation rate from it, are used to determine the future of interest rates as well as the overall market.

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