Fundamental analysis deals with methods of qualitative and quantitative analysis regarding reports issued by companies dealing with the current value of its holdings, (or Intrinsic Value), and predictions of its future earnings.
For example, a common dislike of a particular security by a wide circle of investors for no parent reason can cause a profitable company’s stock to decrease in value. Obviously, this influences are very difficult to predict using some form of scientific analysis. Second, there is a so-called theory of market efficiency according to which there are three degrees of efficiency.
The first is Weak. This is where only historical data is available for the market participants.
The second is Semi-strong. This is where the participants have access to public information, such as publications, news, etc., as well as historical data.
3. Strong – This degree comprises both weak, and semi-strong, and further includes private information.
The US markets are considered to be between the Semi-strong and Strong degrees of efficiency. In contradiction to fundamental analysis the theory of market efficiency assumes that all the securities in the market are traded at fair value. In other words all publicly available information on a company is already incorporated or discounted in a market price of its stock. The theory suggests that the market discounts not only real facts but also expectations, rumors, forecasts and so on. As a result, any attempt made by a financial analysis to identify an undervalued security using this theory is doomed to failure. Despite the skepticism raised by the opponents of fundamental analyses, it is a actively used by investors as a forex indicator, when choosing the securities to include in the portfolio. The results of fundamental analysis are especially valuable for long-term, and intermediate-term investments. For traders, whose horizon is limited to several months, weeks or even day-trades, technical analysis, which will be discussed in detail later, rather than fundamental analysis is utilized.