Stock Market Glossary
Fundamental analysis
Evaluation of a company based on balance sheet, income statement, competitive situation and prospects.
In brief: Evaluation of a company based on balance sheet, income statement, competitive situation and prospects.
Meaning in practice
Fundamental analysis attempts to estimate the fair value of a share – for example using discounted cash flow, multiple comparisons or balance sheet ratios. It is the basis of long-term investment decisions, in contrast to short-term chart technology.
Context for investors and traders
For traders, this term is most useful when preparing and executing an order. Its meaning depends on the venue, liquidity, time frame and order type. A single reading is not a reliable buy or sell decision.
How to use this in practice
In practice, the term should be linked to a specific trading plan: entry, exit, position size and costs belong together. In short time frames, spread, slippage and delayed execution can quickly outweigh the theoretical benefit of an observation.
What to keep in mind
Write down which observation confirms or invalidates your assumption before trading. This keeps the term a decision-making tool rather than a retrospective justification for risk already taken.
