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What is Fundamental Analysis

Definition and Basics of Stock Trading


Definition: Fundamental analysis, with regard to stock investing, involves analyzing financial statements for the purpose of selecting quality stocks. Data from the financial statements is used to compare with past and present data of the particular business or with other businesses within the industry. By analyzing the data, the investor may arrive at a reasonable valuation (price) of the particular company's stock and determine if the stock is a good purchase or not.

Fundamental analysis is a form of an active investing strategy, which means the investor believes they are able to pick stocks in such a way that is favorable to a passive investing strategy. This investing technique is disputed by the efficient-market hypothesis (EMH) which states that all known information about investment securities, such as stocks, is already factored into the prices of those securities. Therefore no amount of analysis can give an investor an edge over other investors.

Fundamental investors often use ratios, such as Price/Earnings (P/E Ratio) and Price/Book (P/B Ratio) to determine valuation.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.

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