Investment Research Definition Examples How It Works

What is Investment Research?

It gives investors an insight into the company’s standing in the market, which helps them to decide whether investing in a particular company is viable or not. Unfortunately, investors often don’t get the data on time, which traps them into buying an overvalued stockOvervalued StockOvervalued Stocks refer to stocks having more current market value than their real earning potential or the P/E Ratio. Overvaluation of stocks might occur due to illogical decision making or deterioration in a Company’s financial health. read more. Investment research helps in removing the information gap and letting investors make more efficient and profitable decisions.

Explanation

Investment Research of any stock starts with data collection, which is then analyzed, and finally, a report is being submitted, giving the pros and cons of the data taken. Time is of the essence because any non-updated vital information can drastically impact the investor’s decision. Many tools are used for such research as Stock ChartsStock ChartsStock chart in excel is also known as high low close chart in excel because it used to represent the conditions of data in markets such as stocks, the data is the changes in the prices of the stocks, we can insert it from insert tab and also there are actually four types of stock charts, high low close is the most used one as it has three series of price high end and low, we can use up to six series of prices in stock charts.read more, Signals, and Screeners, which help the investor know where the company’s stock will move. Many analysts prefer to opt for fundamental, technical, bottom-up, or top-down approaches. Such tools evaluate business cyclesBusiness CyclesThe business cycle refers to the alternating phases of economic growth and decline.read more, market sectors, management competence, industry trends, etc.

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Example of How Investment Research Work

Now let us take an example to understand it more clearly. For example, Mr. Jack, an investor, wanted to invest in ABC Corporation, whose share is being traded at $150 per share in the market. After spending time on the company’s background and valuation reports, by doing technical and fundamental analysisTechnical And Fundamental AnalysisFundamental analysis refers to the analysis of financial aspects of business like financial statements and financial ratios and other factors like economic and others affecting the business to analyze the fair market value of its share/security whereas technical analysis refers to the analysis of share/security fair price by examining and analyzing the past trends and changes in price of shares and by studying historical information of business.read more, Mr. Jack believes that the company share’s worth is only $100 because it’s about to report earning 60% lower than expectations. Now, being a prudent investor and observing the market sentiments, Mr. Jack will short the stock and buy a call option at an exercise priceExercise PriceExercise price or strike price refers to the price at which the underlying stock is purchased or sold by the persons trading in the options of calls & puts available in the derivative trading. Thus, the exercise price is a term used in the derivative market.read more of $ 175 to restrict his losses if the stock moves in the opposite direction. Such decisions can only be taken when an investor has a bird’s eye view of the company’s performance. Investment Research helps an investor select the type of investment instrument that best suits his needs, taking into consideration his risk appetiteRisk AppetiteRisk appetite refers to the amount, rate, or percentage of risk that an individual or organization (as determined by the Board of Directors or management) is willing to accept in exchange for its plan, objectives, and innovation.read more.

Another Example

Mr. Jacob wants to invest $1 00,000 in shares. However, he is confused about whether to go for share A, trading at $70, and share B, trading at $200. In layman’s terms, Mr. Jacob should go for $ 70 because it could fetch him more shares. But, understanding the company’s history and expansion plans of company B makes it wise to invest in share B because there is a potential for a company’s growth. Investment Research helps an investor to choose wisely in such situations.

Advantages

Investment Research tries to capitulate all the factors that influence an underlying asset’s price. For example, while analyzing the performance of a mutual fundMutual FundA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread more, an investor opts for a peer comparison of other mutual funds, their expense ratio, management stability, and other relevant factors.It leaves less or no scope for mistakes since many factors are being considered. Investors can protect themselves from the risk of fraud, inaccuracy of information, etc.It is cost-effective because investors can fetch quality information at an affordable price. Moreover, the benefits accrued from the information outweighs its costs.Whenever an investor can gauge the overall performance of a company, it gives him an advantage in making more efficient decisions. It gives him an option to choose from the number of securities available that best suits his risk profile.

Disadvantages

Investment research is a time-consuming process. One has to consider all the factors before concluding. Everything has to be studied in depth before taking the final call, from checking the technical levels to knowing the company’s reputation in the market and knowing its competitors’ moves.Any research done tries to capture the recent results and announcements. It ignores other factors that might play a vital role in deciding for an investor. As already said, Timing plays a crucial role while going for Investment research; this leaves less opportunity for the events which were not afresh and essential to have capitulated.One size does not always fit all. Every investor has different goals, time horizons, and incomes. One research cannot fit everyone’s needs. For example, an older investor is more risk-averseRisk-averseThe term “risk-averse” refers to a person’s unwillingness to take risks. Investors who prefer a low-return investment with known risks to a higher-return investment with unknown risks, for example, are risk-averse.read more than a young investor.Every company has different standards for research. For example, while evaluating the performance of a pharmaceutical company, Revenue from Patients and Medicines is taken into account. While going for a bank’s performance, its loan growth, interest rates, interest incomeInterest Rates, Interest IncomeInterest Income is the amount of revenue generated by interest-yielding investments like certificates of deposit, savings accounts, or other investments & it is reported in the Company’s income statement. read more are considered.

Conclusion

To conclude, we can say that investment research helps an investor to ace out and stand long in the market. It helps an investor make an efficient and profitable decision, provided the research has been done, considering all relevant factors. It means an analyst must be a prudent, efficient person who can identify the areas of study which can affect his decision-making.Timing is of utmost importance while doing investment research. The analyst must be able to discount all relevant factors before choosing an alternative within the investor’s risk appetite. The risk and reward ratio must be balanced out completely, whether bonds, mutual funds, stocks, or any other financial instrumentFinancial InstrumentFinancial instruments are certain contracts or documents that act as financial assets such as debentures and bonds, receivables, cash deposits, bank balances, swaps, cap, futures, shares, bills of exchange, forwards, FRA or forward rate agreement, etc. to one organization and as a liability to another organization and are solely taken into use for trading purposes.read more. It can be the best tool if used wisely by the investor.

What is Investment Research?#

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Example of How Investment Research Work#

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