# Understanding Investment Analysis: Types and Importance Explained

![Investment Analysis: Researching and evaluating an investment to predict its future performance and determine its suitability to a specific investor.](https://www.investopedia.com/thmb/i6un3BMxDnKsnjAGRGKkwgHl7mg=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/investment-analysis.asp-final-ae70348b50d34a5bb49d45f644c00cb9.png)

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## What Is Investment Analysis?

Investment analysis entails evaluating investments, industries, and economic trends to predict performance and determine suitability for individual investors. It encompasses examining financial securities, [managing portfolios](https://www.investopedia.com/terms/p/portfoliomanagement.asp), and creating financial strategies. This process aids investment decisions by considering entry price, time horizon, and portfolio role, tailored to diverse investor goals and backgrounds.

### Key Takeaways

*   Investment analysis evaluates securities, sectors, and economic trends to determine performance and suitability for investors.
*   Key approaches to investment analysis include bottom-up, top-down, fundamental, and technical methods.
*   Fundamental analysis focuses on a company's financial health and intrinsic value, while technical analysis studies price patterns and trading signals.
*   Investment analysis helps in deciding entry price, holding duration, and the role of an investment in a portfolio.
*   Investment analysts make informed recommendations based on financial data and economic indicators.

## Key Factors in Investment Analysis

Investment analysis aims to predict an investment's likely performance and its suitability for a specific investor. Essential factors include the right entry price, the expected holding period, and the investment's role in the overall portfolio.

In conducting an investment analysis of a mutual fund, for example, an investor looks at how the fund performed over time compared to its [benchmark](https://www.investopedia.com/terms/b/benchmark.asp) and to its main competitors. Peer fund comparison includes investigating the differences in performance, expense ratios, management stability, sector weighting, investment style, and [asset allocation](https://www.investopedia.com/terms/a/assetallocation.asp).

In investing, one size does not fit all. Many investors have unique goals, time frames, and incomes, and there are investment options that match these individual needs.

Investment analysis can also assess an overall strategy, considering the thought process, the person's needs and financial situation, portfolio performance, and the need for any adjustments.

Investors who are not comfortable doing investment analysis on their own can seek advice from an [investment advisor](https://www.investopedia.com/terms/i/investmentadvisor.asp) or another financial professional.

## Exploring Different Types of Investment Analysis

While there are countless ways to analyze securities, sectors, and markets, investment analysis can be divided into several basic approaches.

### Top-Down vs. Bottom-Up

When making investment decisions, investors can use a [bottom-up investment](https://www.investopedia.com/terms/b/bottomupinvesting.asp) analysis approach or a top-down approach.

Bottom-up investment analysis examines individual stocks based on their valuation, management skills, pricing power, and unique traits.

Bottom-up investment analysis ignores economic or market cycles. Instead, it focuses on finding the best companies and stocks, using a microeconomic approach rather than a macroeconomic one.

Top-down investment analysis takes a global approach. It begins by examining economic, market, and industry trends before focusing on investments that could benefit from those trends.

> **Important**
>
> Proponents of bottom-up analysis include Warren Buffett and his mentor, Benjamin Graham.

In a [top-down approach](https://www.investopedia.com/terms/t/topdowninvesting.asp), an investor might evaluate various sectors and conclude that financials will likely perform better than industrials. As a result, the investor decides the investment portfolio will be overweight financials and underweight industrials. Then it's time to find the best stocks in the financial sector.

In contrast, the bottom-up investor may have found that an industrial company made a compelling investment and allocated a significant amount of capital to it even though the outlook for the broader industry was relatively negative. The investor has concluded that the stock will outperform its industry.

### Fundamental vs. Technical

Other investment analysis methods include [fundamental analysis](https://www.investopedia.com/terms/f/fundamentalanalysis.asp) and technical analysis.

Fundamental analysts focus on a company's financial health and the broader economic outlook. They look for stocks they believe are undervalued by the market, trading below their intrinsic value.

Often using bottom-up analysis, these investors will evaluate a company's financial soundness, future business prospects, and dividend potential to determine whether it will make a satisfactory investment. Proponents of this style include [Warren Buffett](https://www.investopedia.com/terms/o/oracleofomaha.asp) and his mentor, [Benjamin Graham](https://www.investopedia.com/terms/b/bengraham.asp). 

The [technical analyst](https://www.investopedia.com/terms/t/technicalanalysis.asp) evaluates patterns of stock prices and statistical parameters, using computer-calculated charts and graphs. Unlike fundamental analysts, who attempt to evaluate a security's intrinsic value, technical analysts focus on patterns of price movements, trading signals, and various other analytical charting tools to evaluate a security's strength or weakness.

Day traders make frequent use of technical analysis in devising their strategies and timing their buying and selling activity.

## Real-World Example of Investment Analysis

Research analysts frequently release investment analysis reports on individual securities, asset classes, and market sectors, with a recommendation to buy, sell, or hold them. Each firm offers different types of analyses, pointing to where they see trends based on their research.

For example, BlackRock, in its Weekly Commentary for Nov. 20, 2023, states that it is neutral in long-term Treasuries because it believes risks are more balanced after the last three years of rising rates. It believes the U.S. is on a weak growth path due to policy rates staying high and, therefore, does not see stocks going through significant growth. Higher rates are causing businesses to stagnate, according to BlackRock.

That being said, BlackRock is overweight in stocks as it believes the overall returns of stocks will be higher than that of fixed-income securities in the next decade.

## What Are the Main Steps of Investment Analysis?

The first step to investment analysis is identifying an investment opportunity. From there, an investor needs to determine whether this investment opportunity will create higher returns than other available investment options. Lastly, an investor will need to gauge whether the possible reward from this investment opportunity justifies the risks.

## What Are the 2 Types of Investment Analysis Methods?

The two main types of investment analysis methods are fundamental analysis and technical analysis. Fundamental analysis involves analyzing the fundamental aspects of a company, such as its revenues, profits, cash flows, and operating expenses. It also takes into consideration the larger economy and how it might affect a company. Technical analysis looks at the patterns of stocks or other assets and uses charts and graphs to analyze the movement of prices. Technical analysis looks at past data to inform future data.

## What Is an Investment Analyst?

An investment analyst is an individual who analyzes financial assets and the broader economy to make investment decisions for a firm. They spend their time analyzing the financial statements of companies and the performance of the economy through government data, such as GDP, unemployment, inflation, and more. Investment analysts gather data, sort this data, analyze it, and come up with conclusions based on their research. They then recommend buying or selling assets, whether those be stocks, bonds, commodities, or other assets.

## Final Thoughts on Investment Analysis

Investment analysis is crucial for informed decision-making in finance. By evaluating securities, industries, and economic trends, investors can align investments with personal goals, assess risk-reward ratios, and optimize portfolio management. Whether using fundamental, technical, top-down, or bottom-up approaches, understanding the merits of individual assets versus overall market trends is essential.

Investors not comfortable with self-analysis might consider seeking the expertise of an investment advisor for tailored strategies.

> **Article Sources**
>
> 1.  International Business Times. "[Warren Buffett's 'Bottom Up' Approach to Investing Is What's Needed In Trying Times](https://www.ibtimes.co.uk/warren-buffetts-bottom-approach-investing-whats-needed-trying-times-1627582)."
>     
> 2.  BlackRock. "[Weekly Commentary, Nov. 20, 2023](https://www.blackrock.com/corporate/literature/market-commentary/weekly-investment-commentary-en-us-20231120-volatility-a-key-feature-of-new-regime.pdf)," Pages 1 and 4.