Social Trading and Fundamental Analysis
This lesson will cover the following
- What is fundamental analysis
- How does knowing this help you?
- Final words
Dont let the name fool you – there is nothing fun about fundamental analysis. Its a complicated form of analysis that requires you to have a good understanding of the foundations of the, lets say, company you wish to analyze. You need to look at things like revenue, expenses, assets and more in order to determine the intrinsic value of the company. Many would argue that fundamental analysis is more complicated than technical analysis (well, mostly fundamental analysts would argue that). The same people would argue that its also more accurate than technical analysis, but you know how people are – they like to argue. If you want to know our opinion (and since youre reading this we assume you do), it is that both fundamental and technical analysis are important and complicated. We still stand firm behind the belief that the more you know, the better. In this respect, weve decided that it would be a good idea to give you at least a brief explanation of what fundamental analysis is.
What is Fundamental Analysis?
Weve talked a lot about technical analysis on our site. Even if you havent read the actual technical analysis tutorial (not everyone is interested in learning it, we suppose), you should have at least skimmed through the “What you need to now about technical analysis” section of the current guide. If thats the case, then you know that technical analysis is mainly interested in price movements. Technical analysts spend hours upon hours looking at different graphs and charts that tell them how the price of an asset has behaved in the past. Based on that information, they draw conclusions about how it will behave in the future.
Fundamental analysis goes way deeper than that. Fundamental analysts aim at determining the intrinsic value of the asset. All the factors that might have an influence on the business are taken into consideration. Its called “fundamental” analysis for a reason. To many fundamental analysts, technical analysis is too superficial to yield good results. Whether they are right or not is highly debatable. What we can say for sure is that they are trying to look at the big picture. Everything is taken into consideration – company revenue, actual profits, debts, even management. Those are only a few of the factors that are looked at. There are many more, but for the purpose of this introduction, this is enough.
It ultimately boils down to this – fundamental analysis doesnt simply involve looking at prices, but a much deeper outlook on the company beneath the surface in order to determine how strong the company really is. If the market positions are indeed consolidated, then for a fundamental analyst the investment might be worth it, even if the prices are going down. The idea of fundamental analysis is that price doesnt always equal intrinsic value.
Fundamental analysis is mainly used about stocks and companies, but it can be applied on a more global scale and analyze whole economies. You can use for any security.
How Does Knowing this Help You?
At the first glance, this doesnt help you at all. You are into social trading and thats what you want to learn. So why are we wasting your time with technical and fundamental analysis? You are following and copying traders who know what theyre doing, right? Why would you ever need to read this? Well, the answer is simple – you need this so you can understand your traders better. Weve already explained this when we talked about technical analysis – if you are familiar with these concepts, you can better understand the traders and the strategies they employ. Especially if youre not copying a trader, but using their advice. If you and the said trader think the same thing based on the provided information, then odds are that the trade will be successful. If your opinions differ, well, then may the best man take the profit. In any case, its good to know a thing or two about trading because you wont have to put blind faith in others.
Knowing the difference between fundamental and technical analysis will also help you evaluate the different traders. You can understand their strategies and trading styles much more easily if you know a thing or two about trading. Always remember that copy and social trading are there to shorten the learning curve, but at the end of the day you still have to learn. Even if you want to create a people-based portfolio, it will be beneficial for you to be familiar with the basics of fundamental and technical analysis. You cant lose like this.
Whichever path you decide to take in your trading career, learning all you can is never a bad idea. At the very least you need to be familiar with the terms and what they mean. You cant possibly hope to understand a trader if you dont know what they mean by “technical analyst” in their profile. Finally, its never bad to become more knowledgeable and educated. You can only benefit from knowing more.