Investment analysis pertains to the assessment of financial assets, sectors, or even trends. It also involves analysis of past returns to predict future performance, selecting the type of investment instrument that matches the needs of an investor or even assessing securities like stocks and bonds, and all other forms of measures to yield potential or price movements.

One way of strategizing for an investor’s portfolio management is through investment analysis.

How Investment Analysis Works

Investment analysis plays a crucial role in determining the health of an investment, its suitability to the investor concerning his financial background, and how it will fare along the way. Factors in using an investment analysis include investment capital, the timeframe of the investment, and the impact of the investment in the investor’s portfolio.

For instance, if we are going to employ an investment analysis of an investor’s plan to invest in a mutual fund, the investor looks at considerations such as how the fund performed in comparison to its benchmark. When comparing the benchmark fund, the investors delve into the investigation of the differences in performance, expenses ratios, management stability, sector weighting, investment style, and asset allocation.

There is no specific form of investment suitable for all investors. As investors set varying financial goals and investment capitals, as well as time horizons, securities as an investment will always depend on the investor’s perimeters.

Investment analysis encompasses a broad scope of aspects that can also deal with evaluating an overall investment strategy, when it comes to the thought process involved, financial needs and situation, the effect of economic decisions, and the rectification or adjustment needed when the situation demands.

If an investor lacks knowledge in operating or conducting investment analysis, financial advisors and investment experts can be sought for help.

Investment Analysis Types

There are several ways to analyze securities and other types of investment. Categorizing forms of investment analysis lead us to these types:

Top-down vs. Bottom-up

A couple of the many approaches when dealing with an investment decision are the top-down analysis and the bottom-up analysis. Top-down investment analysis is looking at the macroeconomic viewpoint of investing. This means that the analyzing is focused on economic, market, and industry trends. The significant yields of the analysis will determine the investor’s decision of which investment to take.

Bottom-up investment analysis, on the other hand, is when the analysis focuses on scrutinizing individual stocks for their merits, such as valuation, management competence, pricing power, and other characteristics of the stock and underlying company. In essence, bottom-up investment analysis takes the small-scale economic method to invest rather than looking at the bigger picture of the economy.

An investor using a top-down approach to investing is when he studies different company sectors and discovering that the financial sector companies are well-performing than the industrial sector companies. In effect, the investor decides to invest stocks in the best financial sector company. Meanwhile, an investor using the bottom-up investment analysis approach would be looking at a particular industrial sector company and invest there despite the sector’s negative outlook from financial experts.

Fundamental vs. Technical Analysis

The fundamental approach to investment analysis involves considering the financial health of companies, along with their economic outlooks. Investors making use of the structural approach look to invest in stocks that the market has mispriced by trading it at a price lower than that warranted by their company’s intrinsic value.

The technical investment analysis dwells on evaluating patterns of stock prices and statistical parameters through the use of charts and graphs. If the fundamental approach is about evaluating the intrinsic value of a security, the technical analysis deals with price movement patterns, trading signals, and other marker-available charting tools to assess the strength or weakness of security. Technical analysis is usually utilized by forex traders as part of their strategies when placing trades.

Investment Analysis at work

Research analysts yield timely investment analysis reports on different securities, asset classes, and market sectors. The reports include a recommendation to investor’s trade decision of whether to buy, sell, or hold a position on the industry.

One example is Charles Schwab’s March 28, 2019 report which he named analysis of consumer staples equities. This particular report took the macroeconomic or top-down approach by looking at the different positive and negative economic developments that could influence the sector. Notably, it probed the retailer cost-cutting efforts, increase in merger and acquisitions, as well as trade disputes and other issues. The analyst rated it as a neutral assessment. The neutral rating implies that the subject of the analysis should provide returns.

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