What Is Investment Analysis?
- The Investment analysis is essential before zeroing in on any investments.
- Investment analysis is a thought process to find out how an investment will perform and whether it is suitable for the determined goals and risk tolerance. It is an evaluation of investment for profitability and risk. The analysis will judge the investment for income, risk, and resale value.
- The investment can range from a single bond in a personal portfolio, to the investment of a startup business and large-scale corporate projects.
- Investment analysis helps individuals to invest wisely and also the big companies to arrange their portfolio management properly. It plays a major role in determining the perfect portfolio management strategy.
- Investment analysis considers the person’s needs and financial situation at a time and what will be the expected performance and whether a correction or adjustment is required. The investment opportunities should be well analyzed to find out the worthiness of funding to invest wisely. That is to determine the viability of investment opportunities.
Types Of Investment Analysis
The approach to investment will differ based on the determined goals and risk tolerance. There are six types of approaches that are possible in investment analysis. They are,
- Top-down approach
- Bottom-up approach.
- Fundamental analysis
- Technical analysis
- Security analysis
- Portfolio analysis
Top-Down Approach
- A Top-down approach is a Global approach. The Global approach starts with the analysis of the economic, market, and industry trends before zeroing in an investment.
- The Top-down approach is actually of a macroeconomic nature and analyzes various sectors with macro-level economic or industry data of the entire market. This type of current trend analysis will be very helpful for big investors.
Bottom-Up Approach
- The Bottom-up approach is a microeconomic nature. It will not focus on the economic cycles and the market cycles/trends. It will always focus on the best-performing companies and stocks regardless of the overarching trends.
- A Bottom-up approach is a conservative approach for small investors
to focus on particular selected companies and they need not focus on the entire market. That is it will focus on management competence, merits, pricing power, and the valuation of selected companies. - Actually, the Bottom-up approach focuses on the merits related to specific companies by analyzing the companies’ financial statements. ( i.e., Profit margin, Earnings ratio )
Fundamental Analysis
- Fundamental analysis weighs the financial health of companies ( i.e., the well-being of the companies ) as well as the broader economic outlook.
- Fundamental analysis is a traditional method and considers long-term interest in investing. It will evaluate the financial soundness of the companies, their future business prospects, and dividend potential. These factors will help the investor to decide whether it will be a satisfactory worthful investment.
- The fundamental analysis will be done by finding out the fair market value of the investment. The financial key factors of debt, interest coverage, current & quick ratio, and Off-balance sheet liabilities should be considered for the evaluation purpose.
- The fundamental analysis is an excellent and effective method of analyzing investments.
Technical Analysis
- The technical analysis focus on patterns of price movements (i.e., patterns of stock prices), trading signals, and various analytical charting tools (i.e., computer-calculated charts and graphs) to evaluate the strength and weakness.
- This type of analysis considers short-term interest in investing and identifies trading opportunities by observing the statistics of the stock market.
- Technical analysis will be very useful to Day traders to devise a proper strategy for timing their everyday buying and selling activity. The people willing to earn quick profit will prefer Technical analysis
Security Analysis
Security analysis is a process of analyzing the strength of an individual investment. The people should be capable enough to determine the intrinsic value of the assets and buy the assets that appear undervalued.
Portfolio Analysis
Portfolio analysis evaluates all the holdings of the portfolio and determines each investment’s role and whether the level of risk exposure is appropriate. It is mainly to safeguard against adverse effects.
Major Factors In Investment Analysis
The following are the three major factors in investment analysis.
- Risk
- Cash flow
- Resale value
In any investment, if the level of risk is too great then the possibility of loss will be also very high. The risk is not a definite factor. It is always related to market, industry, company,y and government policies and changes.
In any investment, the cash flow has to happen properly. The cash flow can be in the form of dividends in a publicly traded stock, interest payments on a bond or cash flows from small businesses to large corporate projects. The attitude of ignoring the cash flow analysis will lead quickly to loss of investment.
In any investment, the resale value can be analyzed by the expected rate of growth of an asset and also the growth of a business. The profit from the resale is through the gain in the market value of the asset. Make sure that the assets predicted rate of growth value ensures good cash flow to overcome the investment’s loss and the risk value.