What Is Fundamental Analysis?

When using a country's currency to assess the value of another country's currency, fundamental analysis includes the study of macroeconomic indicators, asset markets and political factors. Macroeconomic indicators include figures such as economic growth rate, which are calculated by GDP, interest rate, inflation rate, unemployment rate, money supply, foreign exchange reserves, productivity and other factors. Asset markets include stocks, bonds and real estate. Political factors will affect the degree of trust in a government, the climate of social stability and confidence.

Sometimes, the government will intervene in the currency exchange market to prevent the currency from significantly deviating from an undesirable level. The intervention of money market is carried out by the central bank, which usually has a temporary yet significant impact on the foreign exchange market. The central bank can buy or sell its own currency unilaterally with another country's currency, or jointly intervene with other central banks, in order to achieve more significant results. Also, some countries can try to influence the change of currency value through signs or threats of intervention.

Elements of Fundamental Analysis

1. Economic Factors

Economic cycle, national financial situation, financial environment, balance of payments, changes in the economic status of the industry, and adjustment of national exchange rate will affect the ups and downs of stock prices.

Economic cycle is an economic fluctuation caused by the internal contradictions of economic operation, and it is an objective law that is not bound to humans’ will for changes. The stock market is directly affected by the economic environment, and will inevitably show a cyclical fluctuation. When the economy is in recession, the stock market will inevitably weaken and fall; when the economy is in recovery and prosperity, the stock price will rise or show a strong upward trend. According to past experience, the stock market is often the barometer of economic conditions.

When there is a big inflation in the state's financial environment, the stock price will fall, and when the financial expenditure increases, the stock price will rise.

If the financial environment is stable, the market capital is sufficient, the interest rate is reduced, the deposit reserve ratio is reduced, many hot money will turn from the bank to the stock market and the stock price will tend to rise; if the state tightens the monetary base, the market capital is in short supply, the interest rate is raised, the stock price will usually falls.

When there is a surplus in the balance of payments, stimulating the economic growth of the country, it will promote the stock price to rise; when there is a huge deficit, it will lead to the devaluation of the country's currency, and the stock price will generally fall.

2. Political Factors

The adjustment or change of national policies, the change of leaders, the frequent international political turmoil, the transfer of state power that plays an important role in the international exchange, the occurrence of wars between countries, the occurrence of labour disputes and even strikes in some countries often lead to stock price fluctuations.

3. Company Internal Factors

The value of the stock itself is the most basic factor to determine the stock price, which mainly depends on the operating performance of the issuing company, the level of credit, the status of dividend distribution, the development prospect and the expected return level of the stock.

4. Industry Factors

The change of status of industry in the national economy, the development prospect and potential of the industry, the impact of emerging industries, the position of Listed Companies in the industry, operating performance, operating conditions, changes in capital portfolio and changes in leadership and personnel will all affect the price of related stocks.

5. Market Factors

The trend of investors, the intention and manipulation of large investors, the cooperation or mutual shareholding between companies, the increase and decrease of credit trading and futures trading, the arbitrage behaviour of speculators, the way and amount of capital increase of the company may all have a great impact on the stock price.

6. Psychological Factor

The change of investors' psychological state after being influenced by various aspects often leads to mood fluctuation, misjudgement, blindly following the big investors, selling and snapping up. These are also important factors that cause the stock price to plummet and skyrocket.