Fundamental analysis: What it is and when traders use it

The two types of fundamental analysis

Fundamental analysis often combines two broad types of inputs:

Quantitative analysis

Quantitative fundamental analysis focuses on measurable financial and economic data. For companies, this can include items such as revenue, earnings, margins, cash flow, debt, assets and valuation ratios. Financial statements can help investors assess a company on its own and compare it with peers in the same industry. 

For example, investors may review a company’s price-to-earnings (P/E) ratio, commonly calculated as price per share divided by earnings per share, using trailing earnings or forward estimates. Also, they may review income, debt, assets, cash flow and profitability. These metrics can then be compared with those of similar companies in the same industry, although differences in business models, accounting practices, and growth expectations can affect the comparison.

Qualitative analysis 

Qualitative fundamental analysis looks at factors that are harder to measure directly. These can include brand strength, competitive position, management quality, governance, customer loyalty, regulatory exposure and industry reputation. These are often described as intangible factors. They can influence how investors assess a company’s prospects, although they are subjective and can be difficult to value consistently.

Blending both types of fundamental analysis

Some investors use both quantitative and qualitative inputs, while others focus more on one approach depending on the asset, strategy and available information.

This combines measurable data with judgment-based assessment. For example, a company’s revenue growth can be assessed alongside less measurable factors such as management quality or competitive position. This may provide a broader view of the assumptions behind an estimated value.

The order you choose depends on your process and the asset being analysed. Two common approaches are:

• Top-down fundamental analysis. This approach often starts with macro factors, such as the economy, interest rates and sector themes, before examining individual companies or assets.
• Bottom-up fundamental analysis. This approach starts with company or asset-specific fundamentals before considering the broader economic or sector context.

Things to consider when conducting fundamental analysis

Fundamental analysis aims to estimate an asset’s value by considering financial, economic and qualitative information. The relevant inputs depend on the asset being analysed.

Fundamental analysis can be applied across different markets, including stocks, forex, bonds, commodities and indices. However, the relevant inputs and risks differ significantly by asset class.

Note: Forex and other leveraged products can be high risk and may not be suitable for all investors. Where leverage applies, losses can be rapid and may exceed deposits.

The specific metrics depend on the instrument you’re assessing. Examples include:

Stocks

• A company’s revenue and profit
• A company’s debt and liabilities
• A company’s historical growth
• Brand position, governance and management quality
• A company’s growth assumptions and risks
• The company’s industry, competitive position and market conditions

Forex

• Supply and demand for a particular currency or currency pair
• Economic growth, trade balance and fiscal position
• Interest-rate expectations and central bank policy
• Inflation trends and currency sensitivity to global risk sentiment

Government and corporate bonds

• Interest rates and sensitivity
• Fiscal policy, monetary policy and issuer fundamentals
• Credit ratings and creditworthiness, including the issuer’s ability to meet interest and principal payments

Indices

Indices are baskets of securities that track the performance of a defined market, sector or strategy. Fundamental analysis of an index usually focuses on its constituents, sector weights, valuation, earnings profile, geography and methodology. Index comparisons are usually most meaningful when the indices have similar objectives, regions or asset-class exposure.

Commodities

• Supply and demand for the commodity
• Inventory data, production trends and market reports
• Political, environmental, or economic news that can affect supply chains, production or demand

Practising fundamental analysis

Practising in a simulated environment can help traders and investors understand how fundamental analysis works before risking real money. Before using fundamental analysis in live trading, traders need to understand the relevant inputs, assumptions and risks. Once you’re comfortable with the aims of fundamental analysis and how to do it, you could consider using a Saxo demo account. A simulated environment does not risk real money, but conditions can differ from those in live trading, including execution, liquidity, slippage, and emotional pressure.

Remember that fundamental analysis does not guarantee correct valuation or profitable trades. You can review many inputs and still reach a valuation estimate that proves wrong. That’s because unexpected events, changing assumptions, and market sentiment can cause prices to deviate from a valuation estimate.

Therefore, fundamental analysis should not be treated as a route to guaranteed returns. Market movements are uncertain, even when the underlying analysis is detailed. Fundamental analysis does not produce definitive answers or guaranteed returns, but it can help you form a valuation view relative to your assumptions, while recognising that prices can remain above or below the estimated fair value for long periods.