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Fundamental analysis is a method of evaluating a security in an attempt to assess its intrinsic value, by examining related economic, financial, and other qualitative and quantitative factors. Fundamental analysts study anything that can affect the value, including macroeconomic factors (e.g. economy and industry conditions) and microeconomic factors (e.g. financial conditions and company management). The end goal of fundamental analysis is to produce a quantitative value that an investor can compare with a security's current price, thus indicating whether the security is undervalued or overvalued.
Fundamental analysis determines the health and performance of an underlying company by looking at key numbers and economic indicators. The purpose is to identify fundamentally strong companies or industries and fundamentally weak companies or industries.
Fundamental analysis uses real, public data in the evaluation a security's value. Although most analysts use fundamental analysis to value stocks, this method of valuation can be used for just about any type of security. For example, an investor can perform fundamental analysis on a bond's value by looking at economic factors, such as interest rates and the overall state of the economy. He can also look at information about the bond issuer, such as potential changes in credit ratings.
Even the market as a whole can be evaluated using fundamental analysis. For example, analysts looked at fundamental indicators of the S&P 500 from July 4 to July 8, 2016. During this time, the S&P rose to 2129.90 after the release of a positive jobs' report in the United States. In fact, the market just missed a new record high, coming in just under the May 2015 high of 2132.80. The economic surprise of an additional 287,000 jobs for the month of June specifically increased the value of the stock market on July 8, 2016.
Traders are constantly monitoring various economic indicators to identify trends in economic growth. Some of the most watched economic indicators include the Consumer Price Index, housing starts, gross domestic product and the employment report, which contains a variety of data and statistics regarding the employment information of the market.
The employment report is released on the first Friday of every month by the Bureau of Labor Statistics, providing data covering the previous month. The report contains information on unemployment, job growth and payroll data, among other statistics.
The most important payroll statistic that is analyzed from the report is the non-farm payroll data, which represents the total number of paid U.S. workers of any business, excluding general government employees, private household employees, employees of nonprofit organizations that provide assistance to individuals, and farm employees. This data is analyzed closely because of its importance in identifying the rate of economic growth and inflation.
As with other indicators, the difference between the actual non-farm data and expected figures will determine the overall impact on the market. If the non-farm payroll is expanding, this is a good indication that the economy is growing, and vice versa. However, if increases in non-farm payroll occur at a fast rate, this may lead to an increase in inflation. In forex, the level of actual non-farm payroll compared to payroll estimates is taken very seriously. If the actual data comes in lower than economists' estimates, forex traders will usually sell U.S. dollars in anticipation of a weakening currency. The opposite is true when the data is higher than economists' expectations.