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When using stock market fundamentals, a trader will look at the company behind a stock instead of a price chart. The essence of stock market fundamentals is trying to determine whether a company would be a good buy or whether it is underperforming. Traders who use stock market fundamentals look at the balance sheet and other financial statements of a company before making a trading decision.
When trading in the stock market, there are two different methods of analyzing a stock. A trader could use fundamental analysis or technical analysis. Technical analysis is a strategy that utilizes looking at price charts and the price history of a stock. This method tries to identify patterns in the price movements to determine when to get into and out of the market. Fundamental analysis does not use any of these indicators, but instead attempts to identify the true value of a stock by looking at the underlying company.
Individuals who use stock market fundamentals will regularly look at financial documents of the company such as the balance sheet. When using this method, factors such as the cash flow of a company are thoroughly examined. They will look at the return on assets of a company and try to determine how efficiently it is operating.
When looking at the financial statements of a company, fundamental traders will utilize a number of different valuation multiples to make assumptions about a company. Valuation multiples are formulas commonly used to analyze certain aspects of a financial statement. For example, one of the most common valuation multiples is the price-earnings ratio. In order to calculate this, a trader would divide the market value per share of a company by the amount of earnings per share. This number can then be compared to other companies in the same industry to determine if the company is generating enough earnings per share.
Utilizing stock market fundamentals is the way that the majority of stock traders operate. Technical analysis is thought of as something that cannot work consistently by many traditional stock traders. By determining whether the underlying company of a stock is a solid company or not, a trader can more accurately determine what the price of the stock will do in the future. The debate between technical analysis and fundamental analysis will most likely always be going on, but both of them have some merit when it comes to analyzing stocks.