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Fundamental Analysis
Whether we
are talking about the stock market or the Forex market for both it
means economical news though it differs in the way we derive those
news.
For the stock market it means analyzing the financial statements of the
company and finding the real value of the stocks to predict future cash
flows and profits made by the company, as for the currency market it
depends on the Interest Rate, Economy Growth and Inflation affected by
economical, social and political factors which in the end will create
the demand and supply powers in the market.
Fundamental Analysis is used as a tool to help investors deciding on
their strategies so stock market participants will try to find
miss-priced (under valued or over valued) stocks and try to capitalize
on that and consequently the demand or supply level will change on that
company's stocks depending on that company's situation driving the
price up or down to its real value.
If we want to conduct fundamental analysis for the stocks we have to
take into consideration quantitative and qualitative methods, as
quantitative methods is conducted through numerical and statistical
equations taken from the company's financial statement, looking through
its profits, revenues, assets and liabilities, and analysts use a lot
of ratios to examine that company's condition.
As for the qualitative analysis it concentrates on the intangible
aspects of that company such as the level of integrity of the board of
directors and the management, the brand name recognition, the level of
technology they use, patents, competition.
The analysis is based on historical and present data. It's very
important to know if the company you want to invest your money in is
worth that investment or not, what is the level of risk you will bear
for the return you will get? What is the level of their revenues
growth? Is the company is making profits or losses? What is the
company's position in its industry and whether or not could it compete
with its competitors? What is the level of credibility their Board of
Directors and Top Management have? And a lot more of questions but they
all serve the same purpose the projections of that company's financial
situation and its current situation.
Moving on to our main focus which is what does Fundamental analysis
mean for the Forex market???
It almost means everything as the Forex market is more sensitive to the
political, economical (macro and micro), and social factors surrounding
the economy, because it's a bit difficult to decide the exact point to
where you enter the market and the exact point of where you exactly get
out, so it's based on investors beliefs.
So in order to decide what positions do we take in the currency market
we have to understand the overall condition of the country meaning
their political policy as well as the economical news We have to look
for the surprise part in the news because that's the reason why demand
and supply forces move in a certain way resulting in the currency to
incline or decline, an appreciation in the value of a currency will
happen when demand increases on that currency meaning taking buying
positions on that currency on the other hand a depreciation in the
value of a currency will happen when the supply increases meaning
taking selling positions on that currency.
The central bank when deciding the interest rate they look at the
several factors in the economy as they will start looking on the income
as it goes in two parts Spending and Savings, the central bank looks at
the consumer's spending patterns if they spend this will mean that the
sales will increase meaning more production is needed to meet the
increasing demand for products which will lead to increase in
Employment to meet the new levels of production which means active and
growing economy which might lead eventually to inflationary pressures
and the central bank might hike their interest rate in order to bound
inflation on the other hand if consumers are saving their money instead
of spending it as it provides a more attractive return, this will
affect the economical cycle driving the growth levels down so an
interest rate cut might be needed which will provide more money in the
economy to spend on products and help the growth level increase.
All economies have the same cycle in terms of recession and prosperity
if the economy's growth is in a continuing slowing pace it means
recession and as mentioned before this is very likely to be faced by
the central bank by an interest rate cut providing more money in the
economy that is to be invested instead of saving it this phase is
called the recovery and it will lead to prosperity but the cycle will
repeat itself in a reverse way to reach eventually the recession phase
and the same as before will happen again.
Let's take this situation as an example if the several indicators for
the economical health and activity showed us that the country's growth
is strong this would by itself means that the currency will appreciate
as the currency is a reflection of the economy and with the continuing
growth which might reach excessive levels indicating inflationary
pressures the central bank of that country might decide a hike on their
key interest rate as a result of that excessive growth in an attempt to
control the growth levels in order to keep the economy active this will
lead to a further appreciation in that currency as the yield on it will
increase making it more attractive for investors to make profits we
will notice that the effect will take place immediately; with the
expectations for the interest rate to rise and at the time of the
release it will not affect the currency as it already took the effect
by the time expectations rose unless the news came against expectations
then if it's positive news as in this case a hike in interest rate more
than that was expected will lead to an appreciation in the currency and
if the decision was for an interest rate cut it will lead to a
depreciation in the currency.
Yet if you watch the markets closely almost whenever a hike in interest
rates happens the stock market will drop but why is that??? It's
because there are investors who are looking for these opportunities
those investors are called arbitragers when they see a chance like that
in the markets they will draw their funds from one market and put it in
higher yielding markets as in our previous example they will sell their
investments in the stock market to try to capitalize on the interest
rate hike expectations investing their money in that currency meaning
buying it and making profits by selling the currency later.
We have to determine the level of significance for every indicator as
it will lead to projections to other indicators in the economy and
based on that we will decide what strategy we will apply in the
markets.
Other than economical factors we have a very influencing factor which
is the political policies of any country as this might change a lot of
the facts around the world, wars, disasters, and trades agreements all
accounts for something in the Forex market, Even weather affects the
prices.
So in a way or another we have to pay attention to every small detail
around as it might have an effect on financial markets; and for that
provided is a list of detailed fundamentals released from economies
that have their final word on markets.
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Category: Forex for Beginners | Added by: forex-market (2009-09-16)
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Views: 384
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