Fundamental analysis trading jargon demystified

Fsp Invest, 13 Jun. 2013

“Fundamental analysis is the study of the overall economic, financial, political and other factors that represent and quantify the economy in question and can influence a financial instrument,” says Pepperstone.com. These factors help brokers and traders determine future movements in a financial market.
 
That’s why it’s important that “traders understand how to interpret this information and convert it into an educated and successful trade,” adds Pepperstone.com.
 
According to the Ultimate Spread Trading Guide, different brokers use different scoring systems and these are categorised into seven distinct categories.
 
How to decipher fundamental jargon
 
1.    “Buy” (sometimes referred to as “1” by brokers who use a numeric system) means, on a 12 month view, your broker expects the share to outperform its peer group index by 10% or more.
 
2.    “Outperform, add, accumulate, 2 and market outperformer”, means your broker expects the share to outperform, but by less than 10%.
 
3.    Trading buy means your broker’s saying this is a poor quality share, but its shares have fallen so far the bad news is more than discounted. The Ultimate Spread Trading Guide warns, however, that trading these types of shares isn’t a strategy for wealth creation, nor is it one followed by great investors like Warren Buffett.
 
4.    “Hold, neutral, 3 and market performer”. If your broker uses this recommendation, he means the share’s expected to trade broadly in line with index performance over the following 12 months.
 
5.    “Strong buy, European focus list, recommended list and member of ‘model portfolio’ ”. “A couple of years ago, when brokers realised they rated most shares as a buy, a few of them decided to introduce various categories of ‘super buys’ – their overall favoured shares,” says the Ultimate Spread Trading Guide.
 
6.    “Underperform, market underperformer, reduce and 4” means the share’s expected to underperform the market by between 0% and 10% over the next 12 months.
 
7.    “Sell and 5” means the share’s expected to underperform by 10% or more over the following year.
 
There you have it. When spread trading and using fundamental analysis it’s important you understand what these sayings mean to improve your trading success.