Fundamental analysis is a method used by investors to determine the intrinsic value of a security by evaluating both qualitative and quantitative factors that influence a company's performance. This analysis helps investors identify undervalued or overvalued stocks and informs their decisions on buying or selling. The document also discusses applying fundamental analysis to various asset classes, including crude oil, highlighting the importance of understanding market dynamics and external factors that can impact prices.

1. Chapter 6:
Fundamental
Analysis
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2. To many investors, Fundamental analysis is the cornerstone of investing. For the investor, the goal of
having fundamental analysis is to try to discern the intrinsic value of the security that he is interested
to invest in and compare that value with the current market price of the security.
If the comparison shows that the security is undervalued, then the right move would be to buy.
However, if the comparison shows that the security is overvalued, then he should move to sell.
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3. THE BASICS: QUALITATIVE & QUANTITATIVE FACTORS
With the equity market in mind, at the very core, fundamental analysis involves researching everything that affects
the wellbeing of a company as well as all those factors which can affect the wellbeing of the industry which the
company is in.
All the above mentioned factors that can affect the fundamentals of a company can be classified into qualitative
and quantitative factors. Qualitative factors are all those factors which are related to the qualitative nature of a
company. This may include the vision of the CEO or the value of the company’s brand etc. It can also relate to
acquisitions made by the company which in turn could expand the company’s business or burden it with additional
dead weight.
As for quantitative factors, these include data that can be measured such as the cash flow, the liabilities, the profit
earned by the company, in short the financial statements of the company.
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4. QUALITATIVE VS. QUANTITATIVE
While it is only natural to ask if qualitative or quantitative factors will give a fundamentalist a better picture of a
company’s worth, most fundamental analysts do not make their analysis without considering both factors
together. For example, when analyzing the value of Apple’s stock, the analyst will study the dividend paid out to
the shareholders, the P/E ratio and earnings per share. But his analysis will be incomplete if he doesn’t take into
account the value of the iPhone brand.
Nowadays, there are hundreds if not thousands of companies around the world which are capable of producing
smartphones. However, none of these companies can claim that their brand is as recognizable worldwide as the
iPhone brand. Although it is difficult to put a numerical value to the iPhone brand, it cannot be denied that it is
one of the main reasons why customers queue up for days to get their hands on the latest iPhone.
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5. THE CONCEPT OF INTRINSIC VALUE
One of the core assumptions of fundamental analysis is the belief that the stock market does not always reflect the
true value of a stock. If the stock market was 100% efficient in the valuation of a stock, then it would be pointless to
do anymore market analysis. But we know this is not always the case and hence the need to conduct a price analysis
on the security that we are interested to invest in.
The intrinsic value of stock is defined as the value of the stock after one has taken into account all the qualitative and
quantitative factors that might affect its value. For example, the intrinsic value of Apple’s stock can be said to be
when one takes into account the performance of the company as indicated by its financial statements and the
perceived value of its brand worldwide.
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6. Another core assumption about fundamental analysis is the belief that in the long run, the market will always reflect
the fundamentals. The time scale can range from 2 years to even a decade. Nobody really knows how long the time
line can be.
The key point is when one invests based on the fundamentals; it should always be for a significant period of time.
After all, there is no point investing in something when the market price does not reflect the intrinsic value.
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7. FUNDAMENTAL ANALYSIS IN BINARY TRADING
Once we understand the basic concepts of fundamental analysis, we can start to use this tool to help us
analysis the market that we are interested to trade. Because binary trading covers 4 major asset classes, the
fundamentals affecting each class of asset is different. For example, interest rates, GDP data and
unemployment figures are the key quantitative factors which currency traders pay heed to.
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8. TRADING CRUDE OIL BINARY OPTION WITH FUNDAMENTAL ANALYSIS
Now let’s take what we have learnt about fundamental analysis concepts and apply
them to the crude oil market. According to fundamentalists, the price of crude oil is
affected by its supply and demand situation.
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9. In order to determine the total supply and demand in the crude oil market, what traders do is made a
collective estimation as to what the likely supply and demand would be in the foreseeable future. So what are
the factors which can affect this collective estimation?
RELATED ECONOMIC NEWS
The U.S Strategic Petroleum Reserve (SPR)
holds roughly 700 million barrels of oil.
Hence, when the White House recently
announced that it was releasing 5 million
barrels into the market, the news surprised
the market and prompted oil prices to drop
by $2/- (their lowest in 2 months) within
days of the announcement. While the move
by the White House may be seen by some
analysts as applying political pressure on
Russia following its annexation of Crimea,
there is no doubt as to the economic effect
that the news had on the crude oil market.
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10. CHANGING CONSUMPTION PATTERNS
Any report which concerns changes in the consumption pattern of crude will have a direct impact on the perceived
demand for crude oil. Consequently, this will result in falling oil prices.
For example, a survey shows that people nowadays prefer hybrid cars to fuel guzzling muscle cars or SUV. Since
hybrid cars are more economical, this will result in falling demand for gasoline and ultimately crude oil.
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11. GEOPOLITICAL UPHEAVAL
Any geopolitical upheaval that involves oil producers will result in panic in the crude oil market and hence pushing
demand up which will result in skyrocketing prices.
For example, the Ukraine crisis and the fear that Russia, a major oil producer, might be affected by trade sanctions
had helped push crude oil prices up in recent months.
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12. TECHNOLOGICAL BREAKTHROUGH & ALTERNATIVE ENERGY
While this might not have an immediate effect on crude oil prices, technological improvements which lower the cost
of alternative energy such as solar power will definitely impact the future demand for crude oil.
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13. ECONOMIC GROWTH REPORTS
Since oil is the fuel which helps power economic growth, any slowdown in the economic growth of major economies
such as China, Japan, India and U.S will result in the traders having to revise their estimations of future crude oil
demand in the market.
As you can see, from a fundamental analysis point of view, almost any factors can affect the price of crude oil. So as a
beginner commodity trader, it is best that you focus on one particular asset class and preferably on one asset as well
when you are trying to analyze the market using fundamental analysis.
CHINA JAPAN INDIA U.S.
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14. CONCLUSION
At the end of the day, fundamental analysis is all about using data to value the worth of a security. For many investors,
fundamental analysis plays a crucial in the success of their investment strategies making them extremely rich. One
famous name within the financial circles that employs fundamental analysis in helping him to pick profitable
investments is the “Oracle of Omaha”, Warren Buffett. From his track record, we know fundamental analysis is a topic
that no aspiring financial trader can afford to ignore.
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