When you put your money into an investment plan, the hope is to see returns. That is why proper strategizing and analyzing is critical. Operating on hope or chance is not an option.
The good news is there are many tools available for analyzing investments. The bad news is that it can get difficult to know which is the best.
Investment analysis is a skill that one must develop. Fortunately, there are online resources that beginners can use. Such platforms utilize the expertise of top analysts.
You get insights on things like stock rankings, stock ratings, stock price rankings and so much more. The advantage is that it removes the hassle of undertaking the investment analysis.
Wall Street analysts and other experts provide valuable insights on platforms like Wallstrank, Stocktwits, Investorshub, amongst others. With such information within easy reach, you save time and money.
But, even if you outsource the work, it does not hurt to educate yourself a little. We will show you how to choose the correct analyst tools for your investment below.
1. Top Analysts Use Different Tools
Let’s start the discussion by pointing out one fact. Different analysts will use different tools, depending on the situation. Every investment option is unique, depending on the sector or industry. You may need to use more than one approach to get the best results.
Investment analysis aims at uncovering three important factors. These are resale value, risk, and income potential. So what does this mean?
- Risk determines the likelihood of an investment to lose or make money.
- Cash flow has many facets to it. These include dividends, interest payments, or cash distribution to investors. You want to know that the company can repay the investment and the assumed value. All while taking into consideration the risk.
- Resale value is when there is profit arising from higher sales from the original price.
- Analysts use different tools to measure all the above factors.
2. Know the Different Types of Investment Analysis Tools
The scope of investment analysis is broad. Get ready for plenty of research to understand the different facets. We could summarize some of the categories in the following ways.
- Fundamental analysis looks at the intrinsic value of investments. You will, for example, look at financial reports to see the expenses, liabilities, debts, and assets of the company. Such data provide information on the company’s health. The tool also provides information on how the company uses assets to grow the business.
- Technical analysis depends on past trends and patterns. It looks at factors like price movements over a specific period as a basis for future projections.
- Book value identifies undervalued, high-growth companies. You will need to remove the total liabilities from total assets to arrive at a figure. Now, go a step further and calculate the price-to-book (PB) ratio. You do this by dividing the company’s stock price by the book value. The lower the ratio, the more indicative of undervaluing.
- Bottom-up analysis focuses on the merits of the investment vehicles of choice. It tends to ignore market or economic conditions. In such a case, the tools you opt for will measure things like management competence, pricing, and company valuation.
- Top-down analysis is the exact opposite. It focuses on the market, economy, and industry trends. Say you are struggling with whether to invest in a tech or financial company. An industry assessment will let you know which is performing better.
- The comparable model uses benchmarks like price multiples. If products A and B are similar, then their pricing should also be the same. Analysts have leeway with the number of multiples they can use. These include P/E, price-to-cash flow, and so on. When using this model, there are some considerations to have in mind. It should be a publicly-traded company so that you get earnings and stock prices. The earnings from the company must be positive and strong. Negative multiples will have no value.
3. Analyst Ratings Depend on the Right Metrics
The next step is to determine the metrics you will be measuring. There are different types including:-
- ROI or Return-on-investment is the amount of money you will make from your investment.
- ROE or return-on-equity shows how efficient the company is at turning investments into profit. You will need to divide net income by shareholder equity. The higher the ROE, the more sound the investment choice.
- P/E or price-to earnings provides a comparison between current pricing and per-share earnings. It provides valuable insights on how cheap or expensive the stocks are. It is also an excellent tool for comparing industry-specific companies.
- PEG or price-to-earnings growth ratio is another comparative tool. You divide the P/E ratio by projected growth rate earnings.
- EPS or Earning per share refers to the company’s profit. To get the per-share earnings, analysts remove the dividends from the profit. They then divide the balance by shares outstanding.
- Debt to equity is a tool that determines the strength of a company based on debt loads. Investing money in a company with huge amounts of debt would be a bad investment move. You arrive at the figure by dividing total liabilities by shareholder equity.
There are many other metrics top analysts measure. Do take the time to understand the basics of each.
Analyzing investments is not a simple job. There are so many facets to it. That is why we would recommend using some of the online platforms. They contain top analysts who have years of experience in the field.
You get the benefit of advice on the best stocks to buy or where to invest your money. There is no element of guesswork or chance in such instances.
But, as we said before, it does not hurt to educate yourself a little. It gives you greater control over the investments you decide to make.
It is also worth noting that there is no one specific tool for investment analysis. Every analyst has a preferred option, depending on what they hope to achieve.
You will need a good grasp of the different analytics and metrics. In some instances, one tool can give you the results you want. Sometimes, you will need a combination of more than one.