Investment analysis is a general term that covers the many different methods of evaluating financial investments, business sectors, and other economic trends. From analyzing market trends to charting past performance to predict future returns, investors can use investment analysis techniques to help determine how their investments will perform.
Below are a few of the most common practical methods of investment analysis that can help you make better decisions when trading stocks or other financial instruments.
Bottom-Up Analysis
The Bottom-Up analysis evaluates individual stocks based on their merits. Some of these merits include pricing power, the competence of a firm’s management, and market valuation. The Bottom-Up method looks at companies and stocks that perform well regardless of the state of the economy and market cycles. The Bottom-Up analysis takes a more microeconomic approach instead of looking at the overall economy. This approach aims to find the best companies and stocks regardless of market trends.
Top-Down Analysis
In contrast, Top-Down analysis puts emphasis on the economic, market, and industry trends when making investment decisions. For example, if the market for electric vehicles is booming, the investments into manufacturers taking EVs seriously are preferred over traditional international combustions engine (ICE) carmakers. Using Top-Down analysis, investors are required to study the entire market, making this method a comparatively broader approach than any other investment analysis.
Technical Analysis
This method focuses on finding patterns and observing stock market statistics and price movements. Analyzing prices, trading signals, and volume of share trades are common examples of Technical Analysis. While fundamental analysis focuses on the intrinsic value of a stock, technical analysis focuses on the actual price of the stock, not the company’s financial strength of the company or industry. Professional traders use software and other tools to allow for more comprehensive decision-making. Day traders make frequent use of technical analysis to formulate strategies and time their buying and selling activity.
Fundamental Analysis
Finally, you have fundamental analysis, which focuses on the financial health of companies as well as the broader economic outlook. This methodology stresses that at any given time, a company’s shares have an intrinsic value that the market will acknowledge eventually. To reach that goal, the investor must monitor the company’s decisions and resulting financial performance. In addition, analysts must also assess the overall industry the company is in and overall economic health. Metrics commonly used in Fundamental Analysis include earnings-per-share (EPS), dividend yield, and price-to-earnings (P/E) ratio. Investors must analyze the company’s publicly filed reports like the 10-K and 10-Q, third-party reports (example: ratings agencies), as well as review the company’s assets, liabilities, and expenses.
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