Fundamental analysis is a method of stock picking that involves analyzing the financial statements of the underlying company, the industry the company operates in and the macroeconomics conditions of the country that the company sells its goods and services in.

Fundamental analysts can be divided into one of two camps, value investors and growth investors. A value investor is primarily concerned with finding undervalued stocks, while a growth investor is on the lookout for companies with above average sales and earnings growth.

Fundamental analysts usually start off by analyzing the general economy. Factors like the inflation rate, balance of trade, unemployment rate and other economic factors all help the analyst form an opinion on the general economic outlook. Most industries are strongly affected by what goes on in the general economy. And a bad economic outlook usually leads to lower sales, depressed profits and may ultimately lead to bankruptcy of a company. Some companies, grocery chains for one, are not as affected by the economic outlook, and usually grow in popularity when the economy is doing poorly.

Next, a fundamental analyst tries to determine which industry will fare best in current and future economic and political climate. For example, in times of war, corporations in the defense industry usually see a rise in profits, as the military increases spending on weapons. Factors like competition between the companies within the industry, the threat of new entrants into the industry and the threat of substitute products are also taken into consideration.

Finally, the analyst analyzes the financial statements of prospective corporations .The analyst looks at different financial numbers and ratios like total debt, earnings, debt to equity ratio, the quick ratio, the price to earnings ratio, the price to book ratio and so on. The analyst also compares companies within a particular industry. The value oriented fundamental analyst then tries to place a price on a stock, and compares that price with the current price quoted on the stock exchange. If the analysts’ estimated price is under the quoted price then the stock is said to be overvalued. If it is above the quoted price, then the stock is considered to be undervalued. Value oriented Fundamental analyst seek out companies that are undervalued. The growth investor on the other hand, pays more attention to the sales and earnings figures of a corporation. Growth investors look out for companies that have above average earnings growth and that are projected to keep growing at that pace.

With the coming of the computer age and the internet, fundamental analyst now employ computer stock screens in order to identify stocks that meet their financial criteria.

Fundamental analysis remains the most popular way of stock picking and famous fundamental analysts include Warren Buffet, the billionaire investor and Peter Lynch the star mutual fund manager.