fundamental analysis
The evaluation of a security's intrinsic value by examining economic, financial, and qualitative factors including earnings, revenue, and management quality.
Example
“Through fundamental analysis, the investor determined the stock was undervalued relative to its earnings potential.”
Memory Tip
Fundamental analysis looks at the FUNDAMENTALS — the real business behind the stock.
Why It Matters
Fundamental analysis helps you make informed investment decisions by looking beyond stock price fluctuations to understand what a company is actually worth. This approach allows you to identify potentially undervalued investments and avoid overpaying for stocks, which is crucial for building long-term wealth and protecting your retirement savings.
Common Misconception
Many people believe that fundamental analysis guarantees profits or can predict stock prices with certainty. In reality, even thorough analysis cannot account for unexpected market events, economic changes, or irrational investor behavior, so careful analysis should be combined with diversification and realistic expectations.
In Practice
Suppose you are considering buying stock in a company trading at 50 dollars per share. Through fundamental analysis, you examine their annual revenue of 100 million dollars, net income of 10 million dollars, and strong management team. You calculate the intrinsic value at around 60 dollars per share, suggesting the stock is undervalued. You decide to invest, hoping the market will eventually recognize the true value and drive the price higher.
Etymology
From Latin 'fundamentum' (foundation) — analyzing the foundational financial facts of a company.
Common Misspellings
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