Selecting a profitable investment is a challenging for many investors. Fortunately, investors can use investment analysis to help them determine how an investment will perform. Here are a few of the most common methods of investment analysis that can help you make better investment decisions.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="What is Investment Analysis?” data-reactid=”33″>What is Investment Analysis?
Investment analysis is a comprehensive term. As a result, it includes a wide variety of calculations and assessments that analyze market trends, investments and financial industries. Meanwhile, analysts may use a variety of metrics including past returns, yield potential, price movement and more to help them make better investment decisions.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Types of Investment Analysis” data-reactid=”35″>Types of Investment Analysis
With all the data and financial information available, there are a variety of methods analysts and investors use. However, investment analysis can be divided into a few different categories.
Bottom-up analysis assesses individual stocks by using their merits. For example, these merits include pricing power, management competence and valuation. However, this investment analysis method doesn’t focus on market or economic cycles to determine asset allocations. Instead, this method looks at the best companies and stocks regardless of the state of the economy and market.
In other words, bottom-up analysis has a more microeconomic or small-scale perspective and approach instead of looking at the economy at large.
Top-Down analysis examines the economic, market and industry trends before making a more specific investment decision. For instance, say an analyst evaluates different industries and found that technologies outperformed financials. Consequently, they may decide to allocate their portfolio with greater weight in financials than technologies. They will then seek out the best-performing companies within the financial sector.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="In comparison to a bottom-up analysis, an investor may find compelling reasons to purchase a single technology stock and invest a significant amount of capital in the stock. The investor may do this even if the overall outlook on the industry is poor.” data-reactid=”42″>In comparison to a bottom-up analysis, an investor may find compelling reasons to purchase a single technology stock and invest a significant amount of capital in the stock. The investor may do this even if the overall outlook on the industry is poor.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Technical analysis focuses on finding patterns of stock price movements that’s discovered through analysis of a security’s prices and volume of share trades. While fundamental analysis focuses on the intrinsic value of a stock, the technical analysis evaluates the strength or weakness of a security by reviewing a variety of analytical charting tools, trading signals, and price movements.” data-reactid=”44″>Technical analysis focuses on finding patterns of stock price movements that’s discovered through analysis of a security’s prices and volume of share trades. While fundamental analysis focuses on the intrinsic value of a stock, the technical analysis evaluates the strength or weakness of a security by reviewing a variety of analytical charting tools, trading signals, and price movements.
For example, let’s say the average price of a share over a short period (50 days) surpasses the moving average of a share price for a longer period (200 days) technical analysts might see a buying opportunity. Conversely, if a stock’s 50-day moving average price falls below its 200-day moving average, technical analysts might see an opportunity to sell.
Keep in mind technical analysis focuses on the actual price of the stock, not the financial strength of the company or industry or economy. Essentially, if you use technical analysis, you’re assuming pricing history already reflects all important information.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Fundamental analysis focuses around the idea that at any given time a company’s shares have an intrinsic or enterprise value, which the market will acknowledge eventually. To identify this value, the investor must observe the corporation’s financial performance. However, fundamental analysts also assess the state of that firm’s industry and overall economic health.” data-reactid=”68″>Fundamental analysis focuses around the idea that at any given time a company’s shares have an intrinsic or enterprise value, which the market will acknowledge eventually. To identify this value, the investor must observe the corporation’s financial performance. However, fundamental analysts also assess the state of that firm’s industry and overall economic health.
Analysts will closely examine the firm’s reports which are filed with the Securities and Exchange Commission. These reports may include the 10-K and 10-Q, as well as sell-side analysts’ reports on the company.
Now that you understand the big picture of how fundamental analysts determine a company’s value, let’s take a deeper dive into some of the metrics that make up this examination. Keep in mind, some investors may solely rely on each individual metric to make an investment decision.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Price-Earnings Ratio (P/E)” data-reactid=”77″>Price-Earnings Ratio (P/E)
A price-earnings ratio shows the correlation between the price of one share of a stock and the earnings-per-share that the company reports over a period. This period is generally one year. It illustrates the amount of money each investor is putting into the firm for every dollar of earnings the company posts.
You can calculate the P/E ratio by dividing the stock’s market value per share. Often, investors will compare one stock’s P/E to other stock’s P/E in the same industry to determine the value of the stocks. Usually, investors consider lower P/E ratios favorable.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Earnings Per Share” data-reactid=”80″>Earnings Per Share
Earnings per share indicates how efficiently revenues filters down to investors. To calculate a company’s earnings-per-share investors should take earnings remaining for shareholders divided by the number of outstanding shares. If a company has high earnings per share, investors may identify them as a profitable firm.
Investors may use the price-to-book ratio to identify high-growth companies that are undervalued. While the book value of a company is the total number of assets minus total liabilities, you can calculate the P/B by taking the market price of a company’s stock and dividing by the book value of equity. If a company has a low P/B ratio, it’s viewed as undervalued.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="The dividend yield is the relationship between a company’s dividend payments and stock price. To calculate the dividend yield you will divide the annual dividend by the current stock price. You can then compare one company’s dividend yield to another. Investors may select companies with higher dividend yields if they are seeking to invest in companies with high dividend payments.” data-reactid=”85″>The dividend yield is the relationship between a company’s dividend payments and stock price. To calculate the dividend yield you will divide the annual dividend by the current stock price. You can then compare one company’s dividend yield to another. Investors may select companies with higher dividend yields if they are seeking to invest in companies with high dividend payments.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="Return on Equity (ROE)” data-reactid=”86″>Return on Equity (ROE)
Essentially, the return on equity (ROE) reveals the company’s efficiency at turning shareholder investments into profits. ROE takes the net income from a firms’ income statement and the shareholders’ equity from its balance sheet. Therefore, if a company liquidates its assets to pay off debt, ROE is the amount that’s left over for shareholders.
To calculate the ROE, divide a company’s net income by its shareholder equity. The higher ROE a company has the better.
<p class="canvas-atom canvas-text Mb(1.0em) Mb(0)–sm Mt(0.8em)–sm" type="text" content="The Bottom Line
” data-reactid=”90″>The Bottom Line
investment analysis
Selecting the wrong investment opportunity can end up costing you your entire investment or more. While selecting the correct investment opportunity has the potential to help you achieve unlimited gains. Using an investment analysis method can help you make a better and more educated decision.
There are plenty of methods of investment analysis to asses an investment opportunity. Including different valuations into your analysis may help you make a better investment decision. The more information and data you can use, the better the evaluation you may be able to achieve.
Consider talking to a financial advisor about how investment analysis could improve your investment decisions. Finding the right financial advisor who fits your needs doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors who will help you achieve your financial goals, get started now.
Don’t assume that your investment strategy needs to depend exclusively on one kind of analysis. You may find that technical analysis works better in some situations while fundamental analysis works better in other situations.
TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.
The S&P/TSX composite index was up 103.40 points at 24,542.48.
In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.
The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.
The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.
The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.
This report by The Canadian Press was first published Oct. 16, 2024.
TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.
The S&P/TSX composite index was up 205.86 points at 24,508.12.
In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.
The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.
The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.
The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.
This report by The Canadian Press was first published Oct. 11, 2024.
TORONTO – Canada’s main stock index was little changed in late-morning trading as the financial sector fell, but energy and base metal stocks moved higher.
The S&P/TSX composite index was up 0.05 of a point at 24,224.95.
In New York, the Dow Jones industrial average was down 94.31 points at 42,417.69. The S&P 500 index was down 10.91 points at 5,781.13, while the Nasdaq composite was down 29.59 points at 18,262.03.
The Canadian dollar traded for 72.71 cents US compared with 73.05 cents US on Wednesday.
The November crude oil contract was up US$1.69 at US$74.93 per barrel and the November natural gas contract was up a penny at US$2.67 per mmBTU.
The December gold contract was up US$14.70 at US$2,640.70 an ounce and the December copper contract was up two cents at US$4.42 a pound.
This report by The Canadian Press was first published Oct. 10, 2024.
