Along with technical analysis, fundamental analysis is another widely used method when making decisions in the trading market. While technical analysis makes use of past data to predict the future price, fundamental analysis on the other hand provides a much more intellectual analysis through the use of information like sales, ratios, profits, business concept, and competition among many others. Some of the factors that come into play when it comes to fundamental analysis are as follows:
Gross Domestic Product (GDP)
GDP is the broadest measure of aggregate economic activity and this includes every sector of a country. It represents the total value of the country’s production during the period and these consists of the purchases of domestically produced goods and services by individuals, businesses, foreigners as well as government entities. The GDP of a country is an important fundamental analysis factor because it is the most comprehensive economic scorecard. Traders closely keep track of the economy because it usually dictates how investments will perform. Healthy GDP growth usually translates into strong earnings for the corporate entity.
Personal Income and Outlays
Personal income is the dollar value of the income received from all sources by individuals. Personal outlays on the other hand include consumer purchases of durable and non durable products and services. Since the Personal Income gives a household the power to spend or save, this makes a handy way to gauge the strength of an economy and where it is headed.
International Trade Balance
Another important factor in the fundamental analysis is the International trade. The level of this as well as the changes in imports and exports specifies the trends in the foreign trade. This is important because the data involved can directly impact the financial markets especially the foreign exchange value of the dollar.
Consumer Price Index
The Consumer Price Index is a measure of the average price level of a fixed set of goods and services purchased in an economy over a period of time. This is perhaps the most widely used monthly indicator of inflation. The Consumer Price Index is also regarded as the Cost of Living measure because it is used to adjust contracts of all types that are tied to inflation. By keeping track of the trends in the inflation – whether this is rising or falling, traders can anticipate how different types of investments will perform in the market.
This is a record of the number of individuals who filed for unemployment insurance for the first time. Jobless claims are an easy way to get an idea of the strength of a market. The fewer the people file for unemployment insurance, the more have jobs and this tells a lot about the economy.
This is the number of residential units on which construction is begun each month. The rate of housing starts tells us a lot about the demand for residence and the outlook for the construction industry. The trends in the housing starts carry significant clues for homebuilders, mortgage lenders as well as home furnishing suppliers which in turn gives a picture of the trends in the market.
Producer Price Index
The Producer Price Index or PPI measures the average fluctuations in the selling prices that are received by domestic producers for their outputs. The PPI for finished products is a major indicator of commodity rates in the manufacturing sector. Unlike the consumer price index, the producer price index is more sensitive to the pressures of demand and supply.
This is a survey conducted by the Conference Board to determine the attitudes of consumers about the present situation as well as their expectations with the current economic condition. The pattern that is found from this greatly influences the stock and bond markets. A strong economic growth means healthy profits for corporate entities and higher stock prices. When consumers are more confident with the economy and their finances, they have a greater spending power. With this in mind, it is quiet easy to get a hindsight to the direction of an economy.