Meaning of Investment Analysis
Investment analysis is a process of evaluating investment proposal for determining its profitability. It is the one which enables in choosing the best investment option by examining its risk, return and resale value. Investment analysis aims at finding out an investment that best fits a portfolio and suits to the needs of investor. In this process, past returns of investment and market trends are assessed properly to predict about its future performance. Investment analysis is a very beneficial tool available with investors for identifying the best investment option among various alternatives. It can be used for evaluating individual investment securities, large scale business projects and for the investment of startups. Fundamental and Technical analysis are two important methods of investment analysis.
Nature of Investment Analysis
- Evaluate Securities: Investment analysis examines the securities for choosing the appropriate one. It is a tool which helps investor to evaluate investment proposals before taking any investment. Investment analysis aims at choosing the strategic investment plans which fulfill all goals.
- Measures Risk and Return: It measure risk and return of investment plans for determining its overall profitability. Level of risk to be undertaken and cash flows that will be received are two important factors that are considered in every project. Investors through this process are able to determine the profitability of different investment alternatives.
- Deals with Irreversible Decisions: Investment analysis mainly deals with irreversible decisions that are for long terms. These decisions affect the earning capacity and growth rate of investor. In case of any wrong decisions, it may cause huge losses and long term adverse effects.
- Predicts Future Performance: This process is used for predicting the future performance of securities for knowing their credibility. Various charting tools and information like past returns, market trends, economic conditions etc. are studied for estimating the future returns.
- Suits Investor needs: Investment analysis aims at matching the investment with investor preferences and goals. It first properly analyses the individual capability and requirements for performing the analysis of securities. Projects are examined to ensure whether they are appropriate for investor or not.
Scope of Investment Analysis
- Safety of Principal: Investment analysis ensures safety of principal by proper reviewing the stock before investing any amount. It evaluates the risk involved in securities which helps in reducing risk of loss of capital and income.
- Builds Strong Portfolio: Choosing the right type of stock leads to formation of a strong portfolio. Investment analysis studies different types of securities for finding out the one that fits best in portfolio. It focuses on matching the securities with the goals of portfolio for attaining the desired outcomes.
- Enhance Return: Investment analysis have an efficient role in enhancing the overall return of investors. It lay more emphasis on degree of risk involved and amount of return for determining the profitability of stock. Investment analysis helps in selecting the investment plans with more stable income and lower risk.
- Impart Financial Knowledge: It enhances the overall financial understanding of individuals looking for a strategic investment plan. While evaluating the securities, various tools and techniques are used which provides a lots of useful information. This information enables investor in taking rational investment decisions with better return and minimum risk.