Fundamental analysis

Fundamental analysis evaluates a security by studying the underlying business rather than its price chart. A fundamental analyst digs into a company's financial statements — the income statement, balance sheet, and statement of cash flows — along with its management quality, competitive position, industry outlook, and macroeconomic conditions, to estimate the security's intrinsic value.

The toolkit is largely ratio-driven. Analysts compare earnings per share (EPS), price-to-earnings (P/E) ratios, book value, profit margins, debt-to-equity, and dividend payout across companies and over time. If the analysis suggests a stock is worth more than its current market price, it's considered undervalued and a buy candidate; if it's worth less, it's overvalued and a candidate to sell or avoid.

Fundamental analysis is the natural contrast to technical analysis, which ignores a company's financials and instead studies price and volume patterns to time trades. Fundamentalists ask "what should this stock be worth?" while technicians ask "where is the price heading next?" The efficient market hypothesis challenges both, arguing that prices already reflect available information — its semi-strong form implies fundamental analysis of public data can't consistently beat the market.

The SIE, Series 7, and Series 66 exams all test the distinction between fundamental and technical analysis, the major financial statements, and the common valuation ratios. Expect questions asking you to classify a given tool — such as a P/E ratio or a chart pattern — as fundamental or technical.