Fundamental analysis: evidence, valuation and assumptions
Connect financial and economic information to a clearly stated market view.
Begin with the question
Fundamental analysis studies the economic and financial factors relevant to an asset. The evidence needed to assess a company differs from the evidence needed to compare currencies or evaluate a commodity’s supply and demand.
State the question, time horizon and assumptions first. A valuation estimate is a model output, not a price the market must reach.
Read financial statements together
For company analysis, the balance sheet describes assets, liabilities and equity at a point in time. The income statement shows income and expenses over a period; the cash-flow statement tracks cash movements. Read the notes and management discussion alongside the headline figures.
A company can report earnings without generating an equivalent amount of cash. Ratios such as P/E or debt-to-equity need context, including the industry, accounting policy, capital structure and business cycle.
Compare relative conditions in forex
Currency pairs express a relative price. Interest-rate expectations, inflation, growth, trade flows and political developments can affect that relationship. An announced policy change may already be partly reflected in market expectations.
Read central-bank statements and official economic releases rather than relying only on a headline or a single forecast. No individual indicator supplies a dependable trading direction.
Keep the data available at the time
When testing a historical idea, use information that was actually available on each date. Revised economic series, later company restatements or final index membership can introduce look-ahead or selection bias.
Record the publication time, source and revision status of important inputs. A sophisticated model cannot compensate for data that would not have existed at the decision point.
Test sensitivity and reconcile disagreement
Change the assumptions that drive the conclusion, such as growth, margins, discount rates or funding conditions. Consider a range of outcomes rather than a single precise estimate.
Fundamental and technical views can disagree for long periods. Set out how you will handle that disagreement and the risk of being wrong; conviction alone is not a reason to increase exposure.
Further reading
This guide explains concepts and ways to organise your research. It is not a recommendation to trade, a personal allocation plan or a promise of returns. Read the Terms of Business and your account conditions.