What is Investment Research?
Investment Research means analyzing the performance of various financial instruments like stocks, mutual funds, bonds, debentures, etc, so as to provide an investor with a view of how the company is actually performing. It also helps in determining their future performance for price movements.
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. 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 help 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 impact the investor’s decision drastically. There are many tools used for such research like Stock ChartsStock ChartsThe stock chart in Excel, commonly known as the high low close chart, is used to represent market conditions such as changes in stock prices.read more, Signals, and Screeners; all these help the investor to know where the company’s stock is going to move. Many analysts prefer to opt for fundamental, technical, bottom-up, or top-down approaches. Such tools evaluate business cyclesBusiness CyclesThe business cycle represents the expansion and contraction of the economy that occurs due to ups and downs in the gross domestic product (GDP) of a country. It is experienced over the long term and goes parallel with the natural growth rate.read more, market sectors, management competence, industry trends, etc.
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Source: Investment Research (wallstreetmojo.com)
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 will also 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 kind of decisions can only be taken when an investor has a bird’s eye’s view of the company’s performance. Investment Research helps an investor in selecting 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, who wants to invest $1, 00,000 in shares. He is confused about whether to go for share A, which is trading at $70 and share B, which is trading at $200. In layman terms, Mr Jacob should go for $ 70 because it could fetch him more shares. But by understanding the company’s history and expansion plans of company B, it is a wise decision 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 which influence the price of an underlying asset. For example, while analyzing the performance of a mutual fundMutual FundA mutual fund is an investment fund that investors professionally manage by pooling money from multiple investors to initiate investment in securities individually held to provide greater diversification, long term gains and lower level of risks.read more, an investor opts for peer comparison of other mutual funds, their expense ratio, management stability, and other relevant factors.
- It leaves less or no scope of mistake since many factors are being taken into consideration. Investors can protect themselves from the risk of fraud, inaccuracy of information, etc.
- It is cost-effective because the investors are able to fetch quality information at an affordable price. Moreover, the benefits accrued from the information outweighs its costs.
- Whenever an investor is able to 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, which best suits his risk profile.
Disadvantages
- Investment research is a time-consuming process. One has to take into consideration all the factors before coming to a final conclusion. From checking the technical levels to knowing the company’s reputation in the market, knowing its competitor’s move, everything has to be studied in depth before taking the final call.
- Any research which is being done tries to capture the recent results and announcements. It ignores other factors that might play a vital role in making a decision for an investor. As already said, Timing is 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-averse 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 taken into consideration.
- Investment Research cannot be a full proof solution to investment decisions because it fails to capture situations that are contingent or cannot be controlled by any kind of analysis tool. For example, it is challenging to predict insider tradingInsider TradingInsider trading is buying or selling the stocks of publicly traded companies based on confidential information acquired from direct or indirect sources, which will influence the security prices. It is stated as an illegal practice in many countries.read more for an analyst while analyzing the company’s performance. It can only check the past year’s trend or other historical records of the company. Also, there is more emphasis on recent results and announcements.
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 in making an efficient and profitable decision, provided the research has been done, taking into consideration 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 risk appetite of the investor. Be it bonds, mutual funds, stocks, or any other financial instrument, the risk and reward ratio must be balanced out completely. It can be the best tool if used wisely by the investor.
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