What is the difference between a fundamental analysis on the stock market and the FX?
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Thread: What is the difference between a fundamental analysis on the stock market and the FX?

  1. #1
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    What is the difference between a fundamental analysis on the stock market and the FX?

    There are many significant techniques that determine the direction of movement of currencies and assets.
    Undoubtedly, fundamental analysis is one with the highest priority.

    The value of fundamental analysis is often underestimated or misunderstood by beginning traders.
    A lot of people believe that this type of analysis is useful only to investors or traders with long-term positions. However, it is not like this. If you know the basics and concepts of fundamental analysis, you have an opportunity to find the dynamics of financial markets, which are very important for the development of the trader, regardless of the role of
    fundamental analysis in daily trading.
    The fundamental analysis will be divided into 2 segments of the financial market: the currency and the stock market.

    I will try to cover as much as possible in detail by answering the questions:
    - What is the fundamental analysis and how does it affect the priority of movement?
    - What are the features of the fundamental analysis of the currency and stock market?


    And also I will try to disclose the basic methods of fundamental analysis for stocks, bonds, CFDs and other assets, which are represented on the stock market, with a phased disclosure of the sub-topics:
    - What factors influence the movement of an asset and the stock market as a whole?
    - How to evaluate correctly published news and reports for companies, whose shares are traded on the exchange?
    - Where and from what sources it is possible to receive information about the impact on the movement of an asset?

    When you trade on FX market, you should know the answers to the 2 basic questions:
    - what news you should consider the most important of those published in the news line / economic calendar;
    - how you should read the news and determine their impact on the movement of currency pairs and tradable assets;
    - what economic and political factors you can consider as significant ones for work in the FX market.


    In the segment of the fx market, I will present an assessment of the following fundamental factors according to their degree of influence:
    - macroeconomic statistics of countries-issuers of a particular currency and the largest economies of the world;
    - the results of the meetings of the world's largest Central Banks;
    - Specific factors that affect individual currencies.


    On the stock market, the influence of key fundamental factors:
    - corporate reports of companies;
    - sectoral statistics and forecasts;
    - macroeconomic statistics, especially in the largest economies of the world;
    - meetings of the world's largest Central Banks.


    A distinctive feature of the fundamental analysis of the stock and currency market is that the stock market analysis is conducted on a specific company, its activities and profitability are studied, basing on the published reporting data and company news, etc., along with the economic and political situation in the country.


    During analyzes of the foreign exchange market, the movement of currency pairs is investigated and forecasted. Since there are two currencies of different countries in one pair, the influence of both factors is considered. So, in dollar currency pairs, in which the dollar is quoted, first of all, the economic statistics of the USA and the second presented currency are studied, it is revealed - what news will be the most important and can significantly affect the movement of the currency pair in one direction or another.


    Reviews of the use of fundamental analysis techniques, as well as specific options for market reaction
    on those or other events will be presented on real graphs and examples.


    What is the fundamental analysis and how does it affect the priority of movement?
    Fundamental analysis is represented by methods of assessing and forecasting the forthcoming movement of financial markets and its specific instruments. These methods are based on macroeconomic, financial, production, industry and other data relating to a particular market or instrument.
    In other words, fundamental analysis is engaged in assessing the situation from the point of view of political, economic and financial-credit policy. Information on the interest rates of central banks, the economic course of the government, possible changes in the political life of the country, as well as various kinds of rumours and expectations are important in fundamental analysis.


    In practice to conduct fundamental analysis is not so simple. The same factors may have different market value in different conditions or may become decisive from insignificant ones.


    Thus, the success of a trader in conducting a fundamental analysis depends on an understanding of the laws of the financial market, the ability to compare absolutely unrelated events at first glance. Also, a fundamental analysis assumes knowledge of the general picture, specified by the published news only.
    The fundamental analysis allows us to assess the factors, that can affect the movement of exchange rates over a period of several days to several weeks.


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    Fundamental analysis of the stock market.

    A fundamental analysis of the stock market should be carried out in the context of three components:
    - analysis of the state of the economy as a whole;
    - branch analysis;
    - analysis of companies.

    The state of the stock market economy as a whole
    At this level, the influence of economic and political factors on the development of the stock market is considered. The fundamental analysis allows you to find out how much general situation is favorable for investment.
    Particularly important indicators are:
    - The base interest rate in the country and its change.
    The rate`s increase negatively affects the price of a share, and the decrease, on the contrary, supports their growth. This is explained mainly by the large degree of dependence of companies on loans. Growth of these indicators means volumes growth of companies`manufacture, that is reflected in indicators of the share market;
    - oil prices.
    They are extra important for the assessment of companies that are somehow related to the fuel sector, for example, automobile giants Ford General and Motors, airlines companies and etc.
    - political system and the ruling party.
    The arrival of Democrats in the US had a negative impact on the state of the American stock market since it is believed that Democrats are negative about large companies (whose shares are traded on the exchange) and are inclined to increase the tax burden;
    - level of economic activity.
    It is most clearly reflected by ISM's business activity and production activity indexes. The growth of indicators characterizes the rise in the stock market.

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    Country’s base interest rate and its change

    In March 2018 the Fed has rose the interest rate at its first meeting under the chairmanship of Jerome Powell and allowed to tight monetary policy much more in response to tax cuts and increased public spendings in the US, which can stimulate economic growth.
    Last year there was a threefold increase of the interest rate up to 1.25-1.50 percent against the background of a decrease of the unemployment rate and acceleration of economic growth. Market players have predicted that the rate will be increased by another 25 basis points.
    Thereby it is quite justified to expect the raise of stock market and of leading shares of companies in the coming trading sessions.
    We will follow the reaction of the market to the news background on the example of shares of leading companies.

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    Oil price

    Oil plays a key role in a global economy. Significant fluctuations of oil prices are unprofitable for many countries, especially for those that produce and export oil and oil products. World oil production is predominantly controlled by OPEC, the Organization of Petroleum Exporting Countries, which has a major impact on fluctuations of oil prices.
    How do oil prices affect the economy and the stock market as a whole?
    On the one hand, the high cost of energy carriers increases in the cost of production and transportation. With the value growth, which slows production, the incomes of enterprises fall and the stock market is decreasing.. And on the contrary - with the fall in oil prices, the growth of the stock market is predicted.
    Not all experts are inclined to such dependence, but during the already 3-year decline in oil prices, we observe the growth of the stock market in different countries.
    The growth of the German stock market - the Euro Stoxx 50 index - has increased from 2014 from 2600 to 3688.
    DAX - 8300 to 13596.
    The UK index - FTSE 100 - rose to 7792.00

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    The impact of politics on the economy.

    The influence of politics on the economy is manifested in:
    - the stability of political situation - this also affects the stability of economic life, which makes the country attractive for investment, political instability leads to the flight of capital abroad and to "brain drain";
    - through the scientific and technical policy state influences the growth of labour productivity, affects labour conditions and content for workers;
    - the development of a new concept of economic growth, thus, the state embodies them in economic reforms, thereby changing the economic environment.

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    industry analysis

    At this stage are identified the most perspective sectors.
    The dynamics of industries` development reflect the sectoral stock indices. The most famous of them are called:
    - DJIA (Dow Jones Industrial Average), reflecting the dynamics of the industrial sector;
    - DJTA (Dow Jones Transportation Average) - transport sector;
    - DJUA (Dow Jones Utilities Average) - utility sector.
    There is also a range of NASDAQ indices:
    - Nasdaq Financial-100 - is determined on the basis of about one hundred shares of financial companies.
    Following indices - Nasdaq Industrial, Nasdaq Transportation, Nasdaq Bank, Nasdaq Telecommunications, Nasdaq Insurance, Nasdaq Computer, Nasdaq Other Finance, Nasdaq Biotechnology characterize exchange rate fluctuations of shares, belonging to industrial and transport companies, banks, telecommunications, insurance and computer companies, financial non-banking institutions, companies operating with biotechnology.


    In the course of the industry analysis, the industry, that is of the greatest interest and understanding, is chosen, and already in this framework the selection of companies, whose shares are most profitable to purchase, is carried out.

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    In the framework of industry analysis

    All branches can be divided into the main groups:
    Growing branches- characteristic features of which will be a constant and outstripping growth in comparison with sales and profits of other branches. Companies of such industries are called “growth companies” and their shares are “growth stocks”.
    Stable industries are a distinctive feature in the sustainability of their development because they are less exposed to impact of the situation in the economy as a whole.
    Following most general categories of companies` shares in stable industries can be distinguished:
    “Blue chips”- shares with the best investment properties, pay dividends even during unfavourable
    economic situation.
    Defensive - shares of companies, which are exhibiting relative resistance to bad market conditions, more or less stably receive profits and pay dividends.
    Profitable - shares, for which generous dividends are paid. The amplitude of price fluctuations and the capital growth potential of such shares are insignificant.
    Cyclical industries, as a rule, are characterized by special sensitivity to the current phase of the economy (rise, recession, crisis). These industries include, first and foremost, industries that produce means of production, as well as durable goods.
    Withering industries are those that use outdated technology or produce obsolete products.
    Speculative industries - due to lack of verified information present industries of special risk for investors.


    When you have chosen an industry, that seems to be the most attractive and promising, it is important to determine correctly the company, whose shares are going to be purchased.

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    Company’s analysis

    It is necessary to analyze the following performance indicators of companies:

    - to study the annual and quarterly reports of the company's activities - annual report is the main document most fully reflecting the company's activities. It is necessary to consider not published profits as much as dynamics of indicators and their essence;
    - information that the company publishes about itself;
    - information in public statements of company executives, especially its top officials;
    - launching new products;
    - mergers and acquisitions;
    - increase / decrease in dividend payments;
    - availability of government orders at the company;
    - are there any legal proceedings in which the company is involved;
    - how often the manager is changed;
    - availability of shares at top management.
    It is most desirable to visit the information site of the company and to be aware of all the published news, as well as feedback feeds.
    The analysis of the companies is the most complex and time-consuming. At this stage are studied: the financial and economic situation of the company over the past few years, as a rule 3-5 years, the effectiveness of the company's management, and the prospects for its development.

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    Example of Apple company

    We can’t bypass the company Apple, citing examples of the company's analysis.


    Despite the fact that the company has been popular for quite a long time, their shares are profitable for purchase and now. Moreover, such a purchase bring (and will bring) income for a very long time. According to experts` evaluation, products of Apple will remain at the peak of popularity for at least another ten years.


    Apple - a steadily growing company with a market capitalization of $ 850 billion (according to data of 2017)
    Financial results according to the financial statements:
    The annual income is $ 229.2 billion (17g)
    Net income - $ 48.3 billion (17g)
    Total assets: $ 375.3 billion (17 g)
    Total capital - $ 134.1 billion (17g)
    Profitability of profit: 21.09%;
    The capital: 36.07%
    Turnover by categories from sales: iPhone: 77%, iPad: 16%, Mac: 7%
    The company's revenue for 2017 compared to 2016 grew by 6.3%.
    Gross profit increased by 7.9%.
    Net profit for 2017 compared with 2016 increased by 5.8% and reached 48.351 billion dollars.


    Considering the movement schedule of the action, we observe only an upward trend, a corrective decline only gives rise to additional investment options at the expense of buying at the optimal price.
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    Fundamental analysis of the foreign exchange market


    While conducting a fundamental analysis of the foreign exchange market, the following factors,which affect the movement of currency pairs, should be taken into account:


    - statistical data of the country's economy, whose currencies are represented in a pair;
    - publication of Central Bank reports and statements by bank chairmen;
    - change in the volume of GDP;
    - volume and prices of imports/exports;
    - the decision to change the interest rate;
    - unemployment rate.


    Therefore, as the quotation of most of the currency pairs includes dollar, we will consider what data is topically to monitor for the US, which can influence the direction of traffic to a greater extent:
    - The balance of the Federal Budget (the balance of state revenues and expenditures, if equity is positive and negative - in the first case, incomes exceed expenditures, and in the second case, vice verse, does not make a significant impact on the market but is important for long-term analysis of the situation in the economy of the country. I is published on 20th of every month.


    - The Beige Book by the Fed (the survey covers the scope of production, services, financial institutions, agriculture, real estate and the labour market.) There is no noticeable influence on the market, but it serves as a source of additional information for assessing current trends in the economy. It is published 8 times during the year, approximately on 7-8th week.


    - Orders for durable goods (for its calculation is used statistics on goods with a life expectancy of more than three years - furniture, cars, etc. This is a very informative indicator, that characterizes the confidence of consumers at a given time. The acquisition of such expensive goods demonstrates the state of the budget. The growth of the index speaks of a “positive” in the economy and leads to increase in the dollar exchange rate, which is usually published in the last week of the month)


    - a change in the average hourly wage (does not have a significant impact on the market, but in conjunction with other events, the growth of this index can push up the dollar rate. It is published on every first Friday of the month)


    - change in the volume of stocks in commercial warehouses (has a negligible effect on the exchange rate, and is usually in inverse relationship with the dollar rate - because the constant growth of stocks for a long time speaks of "stagnation" in the economy.The data is published in the middle of the month)


    - the change in import prices (demonstrates the monthly change in prices for imported products.) Due to the fact that a large share of the consumer basket in the United States is filled with imported goods and even services, information is important for assessing of inflation, but is has no influence at market. It is published monthly in the beginning of first 10 days of a month.
    - change in the number of people employed in the non-agricultural sector - (important data, that all market participants track, shows changes in employment in all sectors of the US economy, except for agriculture.) It has a very significant effect on exchange rate, usually with the index increasing dollar is becoming stronger. It is published monthly on the first Friday)


    - The PMI index in non-manufacturing sphere and the PMI index in manufacturing sector (has a noticeable impact on the market, the growth of the index indicates a possible strengthening of the dollar)


    - the number of issued construction permits (counting the number of permits already granted for the construction of new houses, the impact on the market is small, but the increase in the index positively affects the dollar exchange rate.) It is published on the third week of each month)


    - Sales in the secondary housing market (contains data on the number of houses sold in the secondary housing market)


    - sales in the primary housing market (a report on the number of houses sold and offered for sale, the indicator grows simultaneously with the rate of loans secured by real estate directly related to the interest rate of the Federal Reserve, the growing value positively affects the dollar rate, is published at the beginning of each month)


    - the decision on the basic interest rate (the FOMC meeting, at which the rate is determined, is held eight times per year with interval from seven to eight weeks. The increase in the interest rate reduces activity in the economy, the decrease - activates it, as credit resources become more accessible for business)



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    Last edited by Gulfstream; 07-23-2018 at 04:45 PM.

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