Although investment is a game of risk and gamble, there remains a bit of accurate prediction. This analysis serves as a guide to you as an investor to help you make the right choice. Different considerations like financial statements, balance sheets, and other factors could be brought to the spotlight and its data used for future prediction. With the right information, you can predict the best asset to invest in and the highly risky ones too.
What is investment analysis?
This is the research carried out on data relating to the potential, profitability, and stability of a business. It is done especially by investors and serves as a guide to investing practices. For starters, this involves analyzing financial statements and balance sheets to determine how healthy the company is. The data contained in this report is a report of the company’s performance and a good indication of potential.
In general, investment analysis includes evaluating past returns to predict future performance. This then guides your decision as an investor. We also evaluate securities like bonds and stocks for yield potential and price movement.
What are the types of investment analysis?
We can divide investment analysis into the following:
- Bottom-Up:
the bottom-up investment analysis involves analyzing each stock individually. This includes their valuation, pricing power, management competence, and other important characteristics. This technique literally takes a bottom-up approach which is microeconomic, rather than the global or macroeconomic one. It is so because the bottom-up aims to find the best companies and stocks regardless of trend performance.
- Top-Down:
the top-down approach on the other hand takes the global approach. It begins with the analysis of important factors like the market, economy, and industry trends. After these, we then consider the investments that benefit from those trends. The consideration process is a top-down approach.
- Fundamental:
This method puts the financial health of the company and its economic standing ahead of all other factors. Using fundamental analysis method, investors seek stocks with mispriced market values. This is a value that is lower than their actual potential or worth. The fundamental approach is usually combined with bottom-up analysis and used to predict the performance of a company.
- Technical Analysis:
technical analysis focuses more on the trading signals, price movements, and professional predicting tools to predict a stock worth. This includes its strength and weaknesses. In this method, investors make use of computer calculated charts and graphs check stock price patterns and other statistics. Day traders mostly employ it by for the timely buying and selling of securities.
What are the factors to consider while evaluating risk in investment analysis?
The factors you should consider while carrying out investment analysis are:
- Risk:
the risk associated with any investment should always be the first thing to consider. It involves a simple logic of the higher the risk, the higher the possibility of you losing your investment. During risk consideration, factors like resale value and cash flow, are not considered because the high-risk investment can be said to be worth nothing.
You can simply use the formula below to evaluate risk:
Risk = Rate of occurrence x the impact of the event.
During risk evaluation, you must consider other factors like the industry, government, specific company, and competitors, etc.
- Cash flow:
cash flow is the next major factor to consider after risk. This is done by looking through all the sources of cash flow like dividends from stock and interest payments on bonds. You should also consider other sources of income of the business. Cash flow is one of the ways through which you can predict the possible investment return of a business. You can use it to check if a business can repay your investment and also cover the assumed value on the risk of investment.
- Resale value:
as an investor, you can make a profit from investing in businesses that have a good resale value. It’s simply a process of purchase at a price and resell for profit after a while. Investments with good resale value are good. As an investor, you should measure the potential growth rate of the business and ensure that the value is higher than the potential loss and estimated value of the investment risk.
Conclusion
Making the right choice is an investor is very important. This is because it plays a large role in how successful your investment could be. You should take the time and diligence in doing a thorough analysis of a business before deciding to invest.