What is "fundamental analysis"?

Fundamental analysis is a method used by investors to evaluate the intrinsic value of a security by examining various qualitative and quantitative factors. This involves a thorough analysis of a company's financial statements, such as income statements, balance sheets, and cash flow statements, to assess its financial health and profitability. Additionally, it considers broader market conditions, economic indicators, industry trends, and management effectiveness to gain insight into the overall value of a security.

By focusing on these elements, fundamental analysis helps investors determine if a stock is overvalued or undervalued relative to its intrinsic value, guiding them in making informed investment decisions. This approach is distinct from other methods, as it emphasizes the fundamental financial health of a business rather than relying on historical price patterns or technical indicators alone. Therefore, recognizing the role of financial statements and market conditions is key to understanding why this is the correct interpretation of fundamental analysis.