What is an 'Investment Analysis'

Investment analysis is a broad term that encompasses many different aspects of investing. It can include analyzing past returns to make predictions about future returns, selecting the type of investment vehicle that is best for an investor's needs or evaluating securities such as stocks and bonds for valuation and investor specificity.

BREAKING DOWN 'Investment Analysis'

Investment analysis can help determine how an investment is likely to perform and how suitable it is for a given investor. It is key to any sound portfolio management strategy. Investors who are not comfortable doing their own investment analysis can seek professional advice from a financial advisor or other financial professional. Investment analysis can also involve evaluating past investment decisions in terms of the thought process that went into making them, how the decision affected a portfolio's performance and how mistakes can be regarded and corrected. Key factors in investment analysis include entry price, expected time horizon and reasons for making the decision at the time.

Performing Investment Analysis

In conducting an investment analysis of a mutual fund, an investor looks at factors such as how the fund has performed compared to its benchmark. The investor can also compare the fund's performance, expense ratio, management stability, sector weighting, style and asset allocation to similar funds. Investment goals should always be considered when analyzing an investment; one size does not always fit all, and highest returns regardless of risk are not always the goal.

Types of Investment Analysis

When making investment decisions, investors can use a bottom-up investment analysis approach or top-down approach. Bottom-up investment analysis entails analyzing individual stocks for their merits, such as valuation, management competence, pricing power and other unique characteristics of the stock and company. Bottom-up investment analysis does not focus on economic cycles or market cycles firsthand for capital allocation decisions but instead aims to find the best companies and stocks regardless of economic, market or particular industry macro trends. In essence, bottom-up investing takes more of a microeconomic approach to investing rather than a macroeconomic one, which is a hallmark of top-down investment analysis.

Top-down investment analysis emphasizes economic, market and industrial trends before making a more granular investment decision to allocate capital to specific companies. An example of a top-down approach is an investor evaluating industries and finding that financials will likely perform better than industrials; as a result, the investor decides his investment portfolio will be overweight financials and underweight industrials. The investor then proceeds to find the best stocks in each sector. On the contrary, a bottom-up investor may have found that an industrial company made for a compelling investment and allocated a significant amount of capital to it even though the outlook for its broader industry was negative.

Other investment analyses include fundamental analysis and technical analysis. Fundamental analysis stresses evaluating the financial health of companies as well as economic outlooks. Practitioners of fundamental analysis seek companies they believe the market has mispriced, that is, assigned a lower price than their intrinsic value. Often encompassing bottom-up analysis, these investors will evaluate a company's financial soundness, future business prospects, dividend potential and economic moat to determine whether they will make satisfactory investments. Proponents of this style include Warren Buffett and Benjamin Graham

Technical analysis stresses evaluating patterns of stock prices and statistical parameters. 

SaveSave

RELATED TERMS
  1. Top-Down Investing

    Top-down investing is an approach that involves looking at the ...
  2. Top-Down Analysis

    Top-down analysis is an investment strategy that looks at the ...
  3. Fundamental Analysis

    Fundamental analysis is the method of analyzing a security to ...
  4. Trend Analysis

    An aspect of technical analysis that tries to predict the future ...
  5. Quantitative Analysis (QA)

    Quantitative analysis (QA) is a technique that seeks to understand ...
  6. Comparable Company Analysis - CCA

    A comparable company analysis (CCA) is a process used to evaluate ...
Related Articles
  1. Investing

    A Top-Down Approach to Investing

    Use a global view to determine which stocks belong in your portfolio with the top-down approach.
  2. Trading

    Technical Analysis Strategies for Beginners

    Technical analysis helps traders and investors navigate the gap between intrinsic value and market price by leveraging certain techniques.
  3. Investing

    Analyzing Mutual Fund Risk

    Find out whether a fund's performance is a result of the manager's abilities or just a fluke.
  4. Investing

    Understanding Fundamental Vs. Technical Analysis

    The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental and technical analysis. Learn the core differences in these strategies and ...
  5. Investing

    Blending Technical and Fundamental Analysis

    Find out how you can combine the best of both strategies to better understand the markets.
RELATED FAQS
  1. What is the difference between fundamental and technical analysis?

    Fundamental analysis and technical analysis, the major schools of thought when it comes to approaching the markets, are at ... Read Answer >>
  2. What is the best method of analysis for forex trading?

    Learn more about the types of forex analysis used by currency traders such as charting tools, economic indicators and/or ... Read Answer >>
  3. How is the ability to perform Activities of Daily Living (ADL) measured?

    Find out how to apply sensitivity analysis to your investment decisions, why sensitivity analysis might be useful and what ... Read Answer >>
  4. How do I take qualitative factors into consideration when using fundamental analysis?

    Fundamental analysis is the method of analyzing companies based on factors that affect their intrinsic value. Find out how ... Read Answer >>
  5. What are some examples of ways that sensitivity analysis can be used?

    Understand the concept of sensitivity analysis and learn about the wide variety of disciplines to which it can be applied. Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center