There are lots of other things to analyse in an earnings report, including cash flow, EBITDA, or other metrics like customer growth. So it’s often best to read as much shares news as you can – specifically anything covering earnings for companies you want to trade – and gauge what you should be paying attention to from there.
You’ll also want to pay attention to anything new about the company outside of its reports. For instance, a new product announcement could have a major impact on its share price in between earnings releases.
Fundamental analysis doesn’t just mean assessing a company’s earnings reports and news, though. It requires taking a holistic approach to weighing up a share’s worth, taking into account any factors outside of the company’s control that could have an impact on its financial success.
The state of the economy a company operates in, for example, will affect its future growth. Economic expansion usually benefits business, so strong macroeconomic data – such as GDP, PMI or retail sales – can increase demand for equities, and see share prices rise.
Interest rates can also play a big part. If rates are high then investors don’t need to take big risks to get healthy returns, which can have a dampening effect on the stock market. So if it looks like a central bank is likely to raise interest rates, demand for shares may drop.
Finally, trends in individual sectors will play out on the prices of major players within. If demand for oil drops, for instance, watch out for share price drops in big oil companies.
Like earnings reports, there are lots of factors to consider when evaluating how external factors might cause demand for a share to rise or fall.
Share price movements aren’t always based on fundamental analysis. The view that traders and investors have on a particular stock can also cause demand to fluctuate, with little actual data to go on.
For example, say that a major investor in a mid-cap stock decides he wants to sell his stock for reasons that have nothing to do with the company’s financial performance or external factors. Other traders may get spooked and decide to follow suit – believing that the stock is on its way down and that the investor knows something they don’t.
The rise of automated trading and technical analysis can make sentiment an even stronger factor in determining share price movement, as algorithms and traders spot the beginnings of a trend and buy or sell accordingly, reinforcing the move.