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Understanding Investment analysis

October 15th, 2009 |

Author: admin

The most dangerous investment in stocks is the word of mouth investment. Wise investors never invest money on stocks because they have heard a particular stock is doing well. Instead, they prefer to do their own investment analysis before investing in stocks.

The analysis is done at two levels: the macro level and the micro level. At the macro level the investor looks at the condition of the economy and the performance of different industrial sectors.

The best time to make an investment is when the country?s economy is growing. When this happens the market size increases, and the companies make more profits. A stagnant economy in comparison can lead to a stagnant stock market where the investor neither gains nor loses. This robs the stock market of its charm, and the investor looks at other sources for investment.

The sectoral analysis is equally important. For instance, in the nineties there was a great demand for technology stocks. These stocks surged forward carrying the stock markets with them. However, once the bubble burst the technology stocks collapsed, and people ended up making huge losses. It is therefore important to invest in sectors that are growing, and reduce investment in sectors that have either become stagnant or have started shrinking.

At the micro level, it is important to study the performance of individual companies. The investor needs to examine the company?s balance sheet to learn the debt position and cash flow. The investor also needs to examine the intrinsic strengths of the company as well as future prospects. These include knowledge about any patents that the company holds that gives it advantage over its rivals, the growth of the company in the past few years, the company?s profitability etc. Equally important is the company?s management. Companies that are managed by professional managers are likely to do better than companies that are run by families.

The investor also needs to study the value of the company?s share price. Is it overvalued? Or is it undervalued? If it is undervalued, then the investor needs to buy the stocks because the company?s fundamental strengths will drive the stock prices upwards.

Very often, it is not possible for investors to undertake such exhaustive analyses before making investments. In such cases, they need to take the help of financial consultants.

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