This type of analysis can be subjective, because the investor is forming a view based on the occurrence of certain outside events. A trader would need to study all levels of data, depending on the asset he is trading, from company level through to industry and markets, on to country wide and global level. Many events are inter-related and can affect the price of different assets and even different asset classes.
Most good brokers will give you access to daily market analysis which provides up to date information on emerging trends, stocks and currencies on the move and news that savvy traders know is invaluable to conduct accurate fundamental analysis. A broker that does not have an up-to-date daily market analysis, in our opinion, fails the most basic requirement for a trader and should be avoided at all costs
Fundamental Analysis Considerations
Fundamental analysis assumes that the market is rational and that a security’s price will eventually reflect the true value of the investment. By contrast, technical analysis assumes that the marketplace will repeat past trends and that a security’s price will eventually move in the same way other investment prices have moved. As such, both theories potentially turn a blind eye to important external data. A stock that announces big unanticipated news is unlikely to continue to complete a price pattern, or to move directly towards its underlying real value. Some of these factors and variables include:
When using a company’s share price as the basis for a binary options trade, full information about the company is absolutely essential. Read news items and press releases and take account of analysts’ views. Use a company’s published accounts in order to calculate certain figures and ratios to assess the company’s worth and performance, including:
» Earnings per share (EPS) that provides a measure of the value of each share
» Price to earnings (P/E) to determine if a share is under- or over-valued
» Projected earnings growth (PEG) to compare the share price to annual growth
» Book value as total assets less total liabilities
» Price to book (P/B) compares the share price to the company’s asset value
» Price to sales (P/S) to show the share price in relation to annual sales
» Dividend yield as a percentage of the company’s share price
» Return on equity (ROE) to determine the effectiveness of using the money invested.
Be aware that any news or information about a company may have far-reaching effects. For example, the announcement of a new product may increase the company’s share price while at the same time forcing down the value of its rivals.
No one company exists in isolation. The performance of an industry will affect the value of all those companies that comprise it. A successful company’s share price may be dragged down by an industry that is in general decline. Conversely, a struggling company may experience an uplift if the wider industry begins to improve. Although a company may perform better or worse than its industry, it will always be associated with it and this will be reflected in the company share price.
It is advisable to watch for industries that are on the upswing and to trade companies that are part of them accordingly. For example, one would generally expect the price of shares in renewable energy companies to be increasing as the market develops and products become more widely available.
The price of commodities will, of course, be influenced by natural disasters and weather events. As such, all assets are affected by supply and demand. For example, a drought or severe storm that ruins crops on a wide scale will force the price to rise. Similarly, a hurricane that shuts down an oil field can cause the price to rise due to supply problems.
Some of the effects of natural events are fairly easy to predict, but they can have far-reaching consequences. If the price of a commodity rises due to a shortage of supply, the share price of the company that supplies the commodity may increase. Conversely, a company that uses a lot of the commodity will suffer a fall in profits and its share price may drop. A country that is a major producer will benefit through exports and its currency may rise.
Markets are often driven by sentiment, with prices quickly rising and falling. Often, there’s no real logical reason for the changes and they can be driven by fear. It’s difficult to predict how markets will move in these situations, but often they establish an upward or downward trend that continues for some time. A successful binary options trader will follow the news in order to identify events that are likely to panic or calm the markets.
Bull markets are established when prices are rising, and the reverse, bear markets, when prices are falling. These markets can become established for long periods, often years, and help you determine the general direction of price movements. This is useful when trading an index but also provides guidance for individual company shares. No matter that a company is successful or unsuccessful, it will be affected by prevailing market conditions. Markets can also become range bound, with prices moving within a narrow band even when the longer-term trend indicated a particular direction. They may also become volatile, with prices varying wildly. Studying events that influence the market will give a guide to overall movements.
In the short-term, it is acceptable for a country to run a large budget deficit. However, if the deficit continues for a number of years, it can become a problem. Countries often devalue their currencies to make exporting easier and to limit imports, thereby reducing or eradicating the deficit. When the currency floats freely, the value often goes down against other currencies that have stronger economies. The Euro zone itself poses a difficult challenge, because there are many countries with different performance levels but only one currency.
Countries themselves often use interest rates as an economic weapon. A rising interest rate makes a currency more attractive and generally causes its value to increase in relation to other currencies. However, different countries can change their rates in the same or opposite directions at the same time, so it’s the differential between the rates that sets the currency pair values. Prices often move in the expectation of an interest rate change.
Budget deficits and falling currencies obviously affect the prices that countries pay for the commodities they import. This can have an impact on other parts of the economy, with share prices particularly affected for those companies that import or export extensively.
Various economic indicators are published that either analyze economic performance or predict future performance. These indicators have different timings in relation to the way the economy changes:
Leading economic indicators are important in predicting price movements, because they change before the economy as a whole does. Stock market returns are one such indicator, because the markets, for example, generally rise before a recession ends.
Lagged economic indicators follow on after the economy changes direction, such as the unemployment rate, which usually improves two or three quarters after the economy re-enters growth.
Coincident economic indicators, such as GDP, tend to move in line with the overall economy.