Fundamental analysis is one of the ways to analyse financial markets and identify the best time to open a trade. Unlike technical analysis, which evaluates past price movements, fundamental analysis focuses on current and upcoming economic and political events that affect price movements.

The main purpose of fundamental analysis is to determine whether the current market price of an asset reflects its real value. The discrepancies between the two numbers provide buy and sell signals:

  • If a market price is higher than the estimated real value, traders anticipate a price drop and sell an asset.
  • If a market price is lower than the estimated real value, traders anticipate a price spike and buy an asset. 

How does fundamental analysis determine the real value of an asset?

The asset’s real value also referred to as true or intrinsic value, can be influenced by many factors, both local (microeconomic) and international (macroeconomic). Fundamental analysis takes into account all these factors and combines the findings to predict market price movements.

Microeconomic analysis studies factors that affect the performance of businesses and companies. Macroeconomic analysis, by contrast, examines broader factors that affect the national, regional, or international economy as a whole.

Moreover, each market has its own set of market-specific factors to evaluate.

How does fundamental analysis evaluate each financial market?

Fundamental analysis is especially popular among stock traders because publicly traded companies have a lot of information easily accessible to anyone, making market evaluation much easier. However, you can also perform fundamental analysis on all the other financial markets using data from different sources. 

Fundamental analysis of stocks

One of the most important documents to study when evaluating individual stocks is a company’s balance sheet – a summary of the company’s financial activities.

The other 2 important documents that can supplement the balance sheet analysis are the income and cash flow statements.

Once a company is studied internally, it’s important to compare it with its competitors and evaluate the entire industry’s health and the country’s economy. This will give you a complete overview of the stock’s real value.

Fundamental analysis of stock indices

As a stock index represents a collection of individual stocks, the first step in analysing an index is to evaluate each stock individually. Once you have an overview of each stock, the next step is to compare it with a whole index.

This will give you a chance to identify the top-performing stocks you need to pay close attention to and the stocks that don’t play a significant role in the index.

The last step is to evaluate the industry or the country’s economic situation, depending on the index you analyse. 

Fundamental analysis of forex

The fundamental analysis of forex pairs measures the strength of a currency, so the main data to analyse is the country’s economic state. Numbers such as GDP (gross domestic product), inflation, and the central bank’s interest rate are important indicators of the economy’s health.

In addition, it’s crucial to keep abreast of political and social events that may influence the currency’s price movement. For example, Brexit caused a significant fall of the GBP, and mass demonstrations in the US in May-June 2021 resulted in the drop of the USD’s value.

Fundamental analysis of commodities

Since the commodity market is primarily made of natural resources, its prices are driven by physical supply and demand. This means the price movements are influenced not only by political and economic events but also by natural disasters.

For example, droughts and floods have a significant effect on agricultural resources, causing shortages and decreasing supply, which leads to increasing prices.

One of the main sources of information about the supply and demand of commodity assets is the Commitments of Traders (COT) report, published by the Commodity Futures Trading Commission. This report provides weekly updates on the state of the commodity market, offering a valuable indication of the upcoming price movements.

Fundamental analysis of cryptocurrencies

As the cryptocurrency market is still very new, performing its fundamental analysis with the same tools as other financial markets is quite challenging. For example, you can’t find out the real value of Bitcoin by analysing a balance sheet of a company that issues it because it is decentralised, and there is no such company.

However, there are still some indicators that can forecast an upcoming price change of cryptocurrencies. Government regulations and news have the most significant effect on its pricing. Every time a country officially legalises or bans cryptocurrencies, their prices tend to swing.

Other factors to pay attention to, are market capitalisation, the number of transactions, and how widely a particular cryptocurrency is accepted. The higher each of these indicators is, the more popular the coin is, and the more likely its price will increase.

To help you evaluate financial markets, Deriv releases a weekly market report every Monday, where you can find an analysis of the previous week’s market performance and information on trending and falling assets.

More data gives you a more accurate prediction, regardless of which market you choose. For better results, you can combine both fundamental and technical analysis. But keep in mind that both fundamental and technical analysis predictions are not 100% accurate and only indicate potential price movements.



Cryptocurrency trading is not available for clients residing within the United Kingdom.