When you’re starting to invest, it feels compelling to follow investment advice you're given by gurus with million-dollar portfolios on Twitter, YouTube, or TikTok and pray that you become a millionaire overnight… 😅
Sorry to burst your bubble but since the internet is flooded with more 'gurus' these days, you don’t really see the full picture at times and you shouldn't be following anyone blindly on the internet, so please Always do your own research.
Then how can you become a quality investor? Simple - learn how to do investment analysis! We'll dive into many different types, learn about them, simplify what works for you and continue improvising on the go!
In this article, we’ll go over:
✅ What is Investment Analysis?
✅ Common Types of Investment Analysis
✅ Factors That Affect Your Investments
✅ Using Tools To Make Better Investment Decisions
As always, let’s get going! 🚀
What is Investment Analysis
In basic terms, Investment Analysis is when you study different factors like economic conditions financial reports, and business competition to see if an investment will be worth it or not.
It helps you to understand if your company (or you as an individual) can expect an investment to be risky or safe to invest in!
Common Types of Investment Analysis
There isn’t a one-size-fits-all approach to investment analysis - in fact, there are different ways you can carry out this process:
Fundamental Analysis
What it is:
Fundamental analysis means looking at important factors to understand how valuable an investment is. You can carry out fundamental analysis by studying financial statements, economic indicators, industry trends, and company-specific information.
It’s like being a detective investigating an investment case. You use financial statements, economic indicators, industry trends, and company-specific information as your tools to uncover the value of the investment. It's a detailed investigation that helps you make smart investment decisions and avoid financial mysteries. 🕵️
How to do it:
Look at a company's financial statements like their:
And also study important ratios, like:
i) P/E (Price-to-Earnings Ratio):
This is the price of a stock relative to its earnings per share. It shows how much investors are willing to pay for each dollar of earnings generated by the company.
The P/E ratio is like comparing the price of a fancy dessert to the amount of money you earn each month. It tells you how much investors are willing to pay for each dollar of a company's earnings.
Just as a high-priced dessert might be a treat worth splurging on if you have a lot of money, a high P/E ratio suggests that investors are willing to pay more for each dollar of a company's earnings because they expect great things from it.
Try to study the ratios of different companies in an industry to get a better idea of the benchmark, but generally, the average ratio varies from 20-25. Anything lower is good, and vice versa!
ii) EPS (Earnings per Share):
EPS is like sharing a pizza with your friends. It represents how much profit a company has made for each share of its stock. Like everyone gets a fair portion of pizza, each shareholder gets a slice of the company's earnings.
The higher the EPS, the bigger the slice of profit each shareholder gets to enjoy.
Speaking of high EPS - A higher EPS means the company is making more profit for each share, which is usually a good thing. But it's also important to look at how the EPS has grown over time to see if the company's performance is overall improving or not.
iii) ROE (Return on Equity):
It shows how well a company uses the money invested by shareholders to make profits.
ROE is like a special potion that makes your money grow faster. It shows how good a company is at making profits with the money invested by shareholders.
Imagine it as a magic spell that turns your investment into more money. If a company has a high ROE, it means they are really good at making your money multiply, just like a powerful potion.
A higher ROE overall suggests that the company is efficiently generating profits with the equity invested by shareholders
Technical Analysis
What it is:
Technical analysis means looking at past market data, like prices and trading volumes, to predict future price movements. It believes that historical patterns can help predict what will happen next.
How to do it:
To do technical analysis, use tools like charts, moving averages, and indicators. Look for patterns and levels that can show when to buy or sell an investment.
So if you want to analyze a stock using technical analysis, you can look at its price history on a chart and find patterns like double tops or bottoms, you can make decisions about when to buy or sell the stock.
Top-down Analysis
What it is:
Top-down analysis is when you look at the overall economy and markets to find good investment sectors or types of investments. You start with the big picture and then focus on specific industries or companies - hencewhy it’s called ‘Top-down’.
How to do it:
To do top-down analysis, keep up with economic news, watch what central banks are doing, and learn about different industries. Look for sectors or industries that are expected to do well based on economic conditions.
Suppose you're thinking about investing in renewable energy. By looking at the economy, government policies supporting sustainable activities, and reports on the industry's growth, you can decide if it's a good sector to invest in or not.
Bottom-up Analysis
What it is:
Bottom-up analysis means focusing on individual companies instead of looking at the whole market. You analyze factors specific to each company, like financial performance, competition, management, and growth potential.
How to do it:
To do bottom-up analysis, research individual companies and look at their financial statements, products or services, competition, and how well they're doing compared to others. Read news about the company and their industry to make smart investment choices.
Let's say you're interested in the healthcare sector - you can analyze individual healthcare companies by looking at their financials, products, and market share, you can decide if a specific company is worth investing in.
Portfolio Analysis
What it is:
Portfolio analysis involves assessing the overall mix of investments in your portfolio. It focuses on diversification, risk management, and aligning your investments with your financial goals.
How to do it:
To analyze your portfolio, look at the different types of investments you hold, such as stocks, bonds, and cash. Assess their performance, risk levels, and how they contribute to your overall investment strategy. Make sure your portfolio is diversified, meaning you have a mix of investments across various sectors and asset classes.
Factors That Affect Your Investment Decisions
As a young investor, understanding the factors that influence investment choices can greatly enhance your chances of success.
Here are five important factors that can significantly impact your investment decisions. 🔽
Economic Conditions and Policies (Micro and Macro):
The economic conditions, both at a macro and micro level, play a vital role in shaping investment opportunities.
Macroeconomic factors, such as interest rates, inflation, and government policies, have a broader impact on the overall economy. For instance, if interest rates are low, it may be an opportune time to invest in real estate or take advantage of low-cost borrowing.
On the micro level, understanding the financial health of individual companies and their potential growth prospects is crucial. Like if a company operates in an industry that is expected to benefit from favorable government policies, such as renewable energy, it may present a compelling investment opportunity!
Business Strategies:
Analyzing a company's business strategy involves understanding its competitive advantage, target market, product differentiation, and growth plans. A well-defined and effectively executed business strategy can lead to increased profitability and shareholder value.
Even a small tech startup can attract investors and succeed in the market if they have a creative product, capable leaders, and show consistent growth.
Company Data:
Analyzing company-specific data is essential for making informed investment decisions.
Factors such as revenue growth, profitability, debt levels, and cash flow generation provide insights into a company's financial health and stability.
Evaluating key financial ratios, such as price-to-earnings (P/E) ratio, return on investment (ROI), and debt-to-equity ratio, can help assess the company's valuation and potential risks.
Market Size & Competition:
Investing in companies that operate in large and growing markets with limited competition can offer greater upside potential.
Conversely, investing in a saturated market with intense competition may limit a company's growth prospects.
Consider the electric vehicle (EV) industry. As governments worldwide emphasize sustainability and reduce carbon emissions, the EV market has witnessed significant growth. Investing in an EV company may offer promising long-term investment prospects assuming competition is still low!
Industry Trends:
Staying updated with industry trends is essential for identifying investment opportunities.
Understanding the factors driving growth in a particular industry and the potential disruptors can help you make well-informed investment decisions. Technological advancements, regulatory changes, and shifting consumer preferences are some of the key factors that influence industry trends.
You can also view our previous 30+ articles on different financial and mindset-based topicshere.
Good luck with your journey! 💰♥️
Disclaimer: This is not financial advice, please do your own research! This content shared byInvesting at 25is purely for educational purposes and to educate people on financial literacy around the world.
