Technical analysis tells you when to trade. Fundamental analysis tells you what to trade. It is about understanding the actual health and value of a company or economy, rather than just the chart pattern. This lesson simplifies the key concepts.
Reading Financial Statements (Simplified)
Every listed company publishes three key statements:
- Income Statement — How much money did the company make? Revenue minus costs = profit (or loss). Think of it as the company's payslip.
- Balance Sheet — What does the company own (assets) and owe (liabilities)? Assets minus liabilities = shareholder equity. Think of it as a snapshot of wealth.
- Cash Flow Statement — Where did cash actually flow? A company can be "profitable" on paper but running out of cash. Cash flow does not lie.
Key Ratios
| Ratio | What It Measures | Good Value |
|---|---|---|
| PE Ratio | Price relative to earnings. How much you pay for £1 of profit. | 10-20 (varies by sector) |
| PEG Ratio | PE adjusted for growth. A PE of 30 with 30% growth = PEG of 1. | Under 1 = undervalued |
| Price/Book | Price relative to the company's net assets. | Under 1 = trading below asset value |
| Dividend Yield | Annual dividends as a percentage of share price. | 3-6% for income stocks |
| Debt/Equity | How leveraged the company is. | Under 1 = more equity than debt |
Earnings Reports
Companies report earnings quarterly (or semi-annually in the UK). The stock price reacts to whether results beat or missanalyst expectations. Even a profitable company can see its stock drop if profits were lower than expected. This is why you often see stocks "gap" (open significantly higher or lower) the morning after earnings.
Warning
Trading around earnings is extremely risky. The stock can move 5-15% in either direction overnight, and no amount of analysis can reliably predict the reaction. Many experienced traders avoid holding positions through earnings reports entirely.
The Economic Calendar
Key economic events that move markets:
- Non-Farm Payrolls (NFP) — US jobs data, released first Friday of each month. Moves forex and indices significantly.
- CPI (Consumer Price Index) — inflation data. Higher than expected = potential rate hikes = market volatility.
- Interest Rate Decisions — Bank of England, Federal Reserve, ECB. The single biggest driver of currency values.
- GDP — quarterly economic growth figures. Recession fears crash markets.
Top-Down vs Bottom-Up
Top-down: start with the macro economy (is it growing or shrinking?), then pick the strongest sectors, then the strongest stocks within those sectors.
Bottom-up: start with individual companies that look undervalued regardless of what the broader economy is doing. Warren Buffett uses this approach.
Where to Find Data
- Company annual reports — free on every listed company's investor relations page
- Yahoo Finance — free, comprehensive, includes analyst estimates
- SharePad — premium UK-focused tool, excellent for screening stocks
- Companies House — free access to UK company filings
Key Concept
Sector rotation: Different sectors perform better at different stages of the economic cycle. Defensive sectors (utilities, healthcare) outperform during downturns. Cyclical sectors (tech, consumer discretionary) outperform during expansions. Understanding where we are in the cycle helps you pick the right sectors.
Risk Disclaimer: Trading financial markets involves significant risk of loss. The content on this page is for educational purposes only and does not constitute financial advice. Past performance is not indicative of future results. You should not trade with money you cannot afford to lose. 70-80% of retail investor accounts lose money when trading CFDs and spread bets. Consider whether you understand how these products work and whether you can afford the high risk of losing your money.