What does the term "fundamental valuation" involve?

Fundamental valuation involves assessing a company's value based on its underlying fundamentals, such as its financial statements, business model, and economic conditions. This approach seeks to determine whether a stock is overvalued, undervalued, or fairly priced by analyzing key metrics like earnings, revenue, growth potential, and overall financial health. Investors who engage in fundamental analysis focus on intrinsic value and aim to make informed decisions based on a company's potential for future performance rather than relying solely on market trends or historical price movements.

In contrast, evaluating investments based on market trends tends to focus on price movements and investor sentiment, which can deviate from fundamental values. Similarly, analyzing previous prices of securities emphasizes historical performance, while measuring risk involves quantifying the potential variability of returns—not directly assessing company value. Therefore, focusing on a company's fundamentals provides a more thorough understanding of its true worth and aids in making investment decisions grounded in financial reality.