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What is Investment Analysis? Types and Advantages

  • Bhumika Dutta
  • Jan 08, 2022
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In the financial sector, investment is a really strong word. People nowadays invest their money in a lot of things. They include liquid funds, Gold, stocks, and various mutual funds.


But when we talk about money, we talk about risks too. And when there is a risk of money humans are bound to get frustrated. With the rise in investment schemes across the world, there is a rise in scams and dilemmas of people investing. 


Many people aren’t sure of the best investment for them, and others, don’t know how to analyze their investment plans. In this process, they end up investing in the wrong place, and most of them even lose their hard-earned money.


To prevent these from happening, one needs to properly analyze their investment before moving even a step ahead. They need to adjudge the profitability and the risks and the tenure for which they are going to invest. This process of analyzing everything before an investment has a word for it. “Investment Analysis”. In this blog, we are going to talk about the same.


Investment Analysis: An Introduction


The practice of evaluating an investment for profitability and risk is known as investment analysis. Its ultimate goal is to determine whether a certain investment is a good fit for a portfolio. It can also range from a single bond in a personal portfolio to a fledgling business investment and even large-scale corporate ventures.


The process of evaluating an investment for income, risk, and resale value is known as investment analysis. It is critical for anybody thinking about investing, regardless of the type. Risk, cash flows, and resale value are the three aspects that most investment analysis methodologies consider.


Analysts use investment analysis to assess investment opportunities, profitability, and associated risks in their portfolios. It assists them in determining whether or not the investment is worthwhile.


Investment analysis can also entail assessing an overall investment plan in terms of the thought process that went into it, the person's needs and financial condition at the time, the performance of the portfolio, and whether it's time for a correction or adjustment.


Investors who are unsure about conducting their investment analysis can consult an investment advisor or another financial specialist. (here)


(Must read: Introduction to Investment Banking)


Factors to look at while doing Investment Analysis


  1. Risk


Risk is the first consideration in every investment analysis. The rationale for this is simple: if the investment's risk is too high, a loss is almost certain. Cash flows and resale value aren't important in this situation because the investment is worthless. One can simply use a variation of the following formula to assess risk:


The rate of occurrence multiplied by the event's impact equals risk.


Despite this, the risk isn't a foregone conclusion. All aspects of the investment must be considered, including the market, industry, government, firm, and others. In this approach, risk assessment is both an art and a science.


(Also read: How Does Risk Management Benefit in Finance?)


  1. Cash Flow


Cash flows are the second aspect of investment analysis. Dividends from publicly traded stocks, interest payments on bonds, and even free cash flow that can be paid to small business investors are all examples of cash flows (again, in the form of dividends). 


One of the ways to return investment is through cash flows. As a result, an investor will want to look at cash flows to see if they can repay the investment while also covering the risk assumed. Future value of cash flows and Discounted Cash Flow Analysis are two methodologies for assessing cash flows. 


Others give each investor an analysis strategy based on the type of investment they're thinking about. Regardless, neglecting cash flow analysis is a surefire way to lose money on your investment.


  1. Resale Value


The resale value of an investment is the third aspect to consider. The profit from selling comes from an increase in the asset's market value. Profit from resale value occurs when an asset is sold to another investor for a higher price than it was purchased for. 


During the investment research process, an investor will want to determine the asset's predicted rate of growth to ensure that the asset's worth and any associated cash flows are greater than the investment's loss and the estimated risk value.


All of these investment research tools can be used on any type of investment, including stocks on the stock market, Treasury notes, the purchase and expansion of a firm, and even currency trading. 


Even though each has its approach for investment research, each requires it if the investor wants to be certain that the risk is worth the profit. Though real estate investing decisions differ from stock investments, the core premise remains the same.


James, for instance, is a personal financial planner. With this position, James spends his days ensuring that investors, from employees to entrepreneurs, select assets that are appropriate for their goals and objectives. If James wants to keep his job, he needs to be an expert in financial analysis and portfolio management.


James is now working with two different clients. He's collaborating with a prosperous 25-year-old and a retired 90-year-old granny. For both, he must make informed selections. 


However, we will soon discover that these choices might be vastly different. It all starts with an investment analysis form to ensure that he understands each party's objectives.


(Suggested read: What are Investment Funds and Their Types?)


Types of Investment Analysis


  1. Bottom-Up


The bottom-up approach focuses on the specific company where the investment will be made. This allows small investors to concentrate and plan their investments in a specific firm rather than examining the entire market for investing purposes. It is a cautious attitude that, on the other hand, aids investors in making the best decision possible.


  1. Top-Down


In a top-down analysis, investors must look at the entire market. This type of technique is generally attractive to large investors. The emphasis is solely on large markets and businesses, not on small businesses. It is a broader approach to investment analysis than any other.


  1. Fundamental


It is a typical way of analysis in which the investor determines whether or not to buy the company's stock by determining the Fair Market Value of the investment. It's yet another good and successful approach to investment analysis.


  1. Technical


By observing stock market information, this strategy is utilized to determine and discover trading opportunities. Experts advise on when and where to invest to maximize profits.


To have a better understanding of this, watch:


Advantages of Investment Analysis


  • Investment analysis is a tool that assists investors in making sound financial decisions.


  • As a result, investors are better aware of market trends and investing strategies. Deriving a solid plan from an expert or on one's own might provide a significant quantity of rewards.


  • While doing analysis, specialists can quickly examine securities and assess their long-term viability and potential for growth. Investors can gain a comprehensive understanding of the securities in which they want to invest by conducting this research.


  • Not only can investment analysis assist individuals, but it may also assist large corporations with portfolio management.




Choosing the wrong investment opportunity might result in your losing all of their money, or even more. Selecting the right investment opportunity, on the other hand, has the potential to help anyone attain limitless earnings. Using a strategy of investment analysis can assist in making a more informed selection. 


There are a variety of investment analysis methodologies that may be used to evaluate an investment opportunity. Including several values in the study may aid us in making a more informed investment decision. The more information and data we have, the more accurate the review will be.


(Related topic: Fundamentals of Corporate Financial Analysis

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