Fundamental market analysis is like?



An investor or a speculator? “Technique” or “Foundation”?
Key sources of information
What metrics to track?
Fundamental analysis in the futures and currency markets

The job of a trader associated with the use of methods of technical and fundamental analysis. Each transaction is a completion of the preparatory stage. The better he performed, the more effective trade. Every trade, regardless of market Forex, market of securities, futures contracts on indexes or commodities; the duration of the transaction – the day trading or investing for the long term – begins with analysis.
An investor or a speculator? “Technique” or “Foundation”?
Short-term and long-term trading have their own specifics. Therefore, the trading algorithm and market analysis for intraday trader and portfolio investors have their differences. A day trader using mainly technical analysis, long-term investors rely on fundamental analysis. At the same time, short-term traders can not pay attention to the release of important macroeconomic statistics. Unexpected news can change the market situation, therefore, many speculators try to exit trades at the time of publication of important statistics or news that can bring an abnormal increase in volatility on markets. Long term traders mostly use techniques of fundamental analysis. At the same time, the open time of the transaction are coordinated based on the technical picture. So fair to say that to a greater or lesser extent, every trader uses both technical and fundamental analysis.

Key sources of information
Fundamental analysis is a set of methods for the assessment of the macroeconomic, financial and sectoral indicators in assessing the current status of the Issuer, industry or overall market and to predict further development of the situation. The change in the market situation is influenced by various factors – geopolitical, social, economic, natural and other. Analyzing the market, the trader takes into account the data, the influence of which is obvious. For traders trading the main sources of information are the financial statements of the Issuer, the balance sheet, statement of profit and loss, statement of cash flows, corporate news – reports about the change of management, takeover, or merger, the issuance or redemption of securities; the data of macroeconomic statistics published by relevant agencies and state institutions. For the sector of biotechnology and pharmaceuticals are key messages about results of research and testing. On quotations of securities of extractive industries is influenced by reports about new discoveries or exploration and production, news about the increase in demand in sectors and regions, as well as other information that could affect investors ‘ decisions to buy or sell the asset. About the sectors of the stock market you can read in our article.

When trading stocks studied the following sources:

Quarterly and annual reports of the Issuer balance (Balance Sheet) statement of financial performance (Income Statement), statement of cash flow (Cash Flow), financial ratios (Financial Ratio). The message on earnings growth, sales, dividends would increase the interest of traders, paper are buying quotes on the day of the report can “take off”. It often happens that the strong report of the company – the industry leader becoming a driver of growth or decline of the whole sector.
Industry statistics, changes in legislation, political factors are also in sight. For example, the trump decision on raising import duties on steel and aluminum in March 2018 “topple” American indexes on the background of a sharp rise in the VIX, which interpretiruya as the “index of fear”. This reaction mainly concerned consumers of steel, as the US is the largest importer of steel and aluminium, and companies in the production of which use these products, feared a sharp rise in prices. Quotes Boeing fell 3.5%, Ford – by 3%, Caterpillar – 2.9%. Shares of the largest U.S. metallurgical corporations on the contrary, rose in price in anticipation of the signing of the corresponding decree – Century Aluminum Co. added of 7.5%, AK Steel Holding Corp. rose by 9.5%. In 2019 a new round of escalation in the trade dispute between the U.S. and China immediately reflected in the quotes, especially “suffered” the technology sector is having big market in the Asian region.
Consensus forecasts of experts. A change in the rating of the Issuer or the earnings forecast could significantly affect investor sentiment and, consequently, leads to more active purchases or sales of shares. You can see a picture – the current account shows net profit, and quotes reduced. You should pay attention to the forecasts of analysts and experts. In this situation, most likely, the consensus forecast was revised downward.

Fundamental analysis of portfolio of the investor and the day trader there are significant differences in the volume of the analyzed data and key performance indicators. For the short-term trader, the important price and its volatility at the moment. For the portfolio investor it is important to assess the potential and prospects of development of the business – how it will be of interest to investors in the future. Understanding the existing dynamics of prices, it helps to conduct fundamental analysis. Connection analysis of fundamental data and determination of the moment of entry into the market using technical analysis, make trade more efficient.

What metrics to track?
At the dawn of the XX-th century Wall Street evaluated the company based on their historical performance. Attractive to investors have considered firms that demonstrated a stable history of profits and dividends, and having sufficient financial assets. Thus, investment in common stock was based on the following fundamental principles:

a well-established history of paying dividends;
positive, stable dynamics of profit;
satisfactory maintenance of the value of the stock of tangible assets.

Over time markets have become more dynamic, and this approach ceased to be relevant. Benjamin Graham and David Dodd in their book “Security Analysis” created a new approach to the valuation of the stock. Their theory could be formulated as follows: “the Value of a common stock depends entirely on what she earns in the future.” The authors argued that there is no relationship between the assets of the company and its ability to earn profits in the future; dividends are also not have a decisive influence on the value of the shares; and the history of profits may be an indicator of probable changes in the future. Graham and Dodd believed that the main factor affecting the value of securities, are projected earnings per share in the future.

The ratio P/E. the Authors first proposed a coefficient for assessing the “fair” value of the stock – P/E, as the ratio of market capitalization and profits (market value of shares and earnings per share) and Forward P/E, as the ratio of price and projected earnings per share. The value of the coefficient is usually in the range from 7 to 30. The rate below the range indicates undervaluation of the stock. The reasons for this situation may be many, and this is a separate question to study. Such paper is potentially interesting to investors. Today, this multiplier is used by traders and experts for the comparative assessment of companies in the same industry.

It compared with the current average value in the industry, its dynamics, together with the assessment of the dynamics of sales, profits and multiples such as P/S, P/B, and others, to obtain information for decision making by the investor.

Many traders start the analysis with the industry, its current state and forecasts. So paper sector basic materials will react to changing market conditions in the commodities market. Shares of pharmaceutical and biotechnology companies actively respond to reports of test results.
Market capitalization (Market Cap) is calculated by multiplying the market price of shares of its common issue (Shares Outstanding). Investments in companies with small capitalization is the most risky because of the very high volatility of their securities, which are much stronger than the overall market, react to changing market conditions. Companies with high capitalization is more sustainable – their business has already earned the trust of investors. However, to evaluate the potential of the stock helps in-depth analysis.

Dynamics of indicators of revenues and profit. Data quarterly Q and annual (Form 10K) reports to assess the trend of changes in key financial indicators. Companies publish statements on their official websites in the section “Investors”, also the data can be viewed on the “MarketWatch”, the SEC, the websites of the stock exchanges on which the instrument is traded.

Most important are the following indicators.

Revenue (revenue) – income from sales of products, equipment, assets, etc.
Net Sales – net sales.
Gross Profit – gross profit – difference between revenues and gross costs.
EBITDA – net profit before tax, interest payments and depreciation. Allows to avoid the influence on the result of the particularities of taxation, depreciation, asset structure.
Net Income – the net profit of the company.
EPS – net profit per share.
ShsFloat – the number of shares in free float.
Short Float – the proportion of short positions in outstanding securities.
Profit Margin – the ratio of profit to revenue.
Operating Margin – the ratio of operating income to revenue percentage. On the figure draw particular attention. In some periods, the net profit could decline, while operating margin will rise, this means that investors do not worry with the business all right.

Income Statement – quarterly report – results of operations (OXY)
Income Statement – earnings per share and dividends (OXY)
Data of balance sheet (balance sheet). Balance sheet reflects the financial condition of the company, the value of non-current and current assets and liabilities, and equity. Balance data, as well as data and other reports, are analyzed in the dynamics, compared to the previous reporting periods. The ratio of current assets to current liabilities is calculated such important indicators as the ratios of quick and current liquidity ratios – Current ratio and Quick ratio, which reflect the company’s ability to settle current obligations, the average normative values, respectively >1.5 and >1.
The asset company OXY
The liabilities side of the balance (OXY)
No less important is the ratio financial leverage Debt/Equity, reflecting the ratio of debt and equity, the principles of business financing; regulatory significance in the U.S. – less than 1.5 or 2; in Russia – less than 1. A separate discussion deserve the rating factors (multipliers) for the comparative assessment of companies from one sector.

P/E – ratio market capitalization and net profit . Market Capitalization /Net Income or market price earnings per share Price/ESP.
P/S – ratio of the company’s capitalization and its earnings, its Price/Sales (normal is less than 2).
P/B ratio of market and book value of the shares.
EV (Enterprise Value) – total value of business.
EV/EBITDA allows us to compare firms with different capital structure and tax system, leveling methods of depreciation and taxes.
forward indicators based on forecast values – the most commonly used PEG, P/E, adjusted by the average annual earnings growth.

Indicators of profitability:

ROE — return on equity the ratio of profit to own capital for American businesses – more than 10% (more exactly depends on the industry).
ROA — return on assets – the ratio of profit to total assets (less informative than ROE).
ROS — return on sales – the ratio of profit (in this case, operating) revenue.

A scenery allow you to set the basic fundamental parameters. filter by fundamental factors
Buying stocks for the long term, investors also pay attention to the history of the company’s business, management and other factors. On the formation of the investment portfolio can be read in an interview with the portfolio of the investor.
Fundamental analysis in the futures and currency markets
When trading futures contracts for raw materials take into account:

reports on stocks of raw materials in the major economies consumers – for example, a weekly report US Department of energy on oil reserves;
the dynamics of macroeconomic indicators in the countries – consumers;
the forecasts of the specialized agencies – for example, the predictions of the “International Union of coffee” can have a significant impact on dynamics of stock quotes of contracts for this product;
natural conditions, geopolitical conflicts in the regions associated with the production of goods or raw materials, severe weather conditions cause the growth of prices of wheat, sugar, coffee, cocoa; conflicts in the Persian Gulf to provoke the growth of oil prices.

When trading on the Forex market taking into account the following fundamental data:

the publication of macroeconomic statistics in the region related to the currency;
the messages of Central banks;
data from the commodities markets, if the export or import of the product has a significant impact on strengthening or weakening the currency;

The analysis of fundamental data helps to get a broader view of the market to understand the balance of power and the likelihood of further price movement.

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