The fundamental analysis examines the underlying causes of the market’s behaviour. It attempts to forecast the changes in the stock prices based on the following factors: the economic indicators of the given company, the assumed future success of its products, the assumed expertise of the management, and the political (or other relevant) environmental factors influencing the firm’s operations.

Through analysis, the desired information is obtained directly from the financial statements of the firm. All decisions related to the market price of the company are based on these statements. The share may be beneficial to buy if these data seem to be favourable compared to the current price of the stock. On the other hand, if the firm is overpriced on the market then the owner of the share should consider the opportunity to sell.

The two most important financial statements are the balance sheet and the income statement (also called profit and loss (P&L) statement):

• The balance sheet captures the current state of the firm. It shows where the capital came from (owner’s equity and liability side) and how it has been used or invested (asset side).
• The income statement shows what happened in a given period (quarterly, semi-annually, or annually): the turnover (revenue) of the firm, the expenses of the period, and the profit earned at the end of the reporting period.