Investment analysis involves the use of relevant ratios, trend analysis, and the opinions of researchers to decide how to allocate funds to various investment vehicles. The following factors are important in investment analysis:
A review of the economic and regulatory factors influencing the industry in which the investor is interested.
A review of the disclosures that accompany the financial statements to see if the company is using conservative accounting practices or is using “gray area” accounting to fudge its reported results and financial position.
An analysis of the investor’s short-term and long-term needs.
After the evaluating the preceding information, one must determine the risk level of the investment. This includes the risk that dividends will change from current expectations, as well as that the sale price of the investment may decline from the original purchase price. This risk is based on many factors, such as the possibility of new competition in the market, changes in technology, changes in government regulations, and changes in tax rates.
The investor must consider the probability of not being able to sell the investment for more than the original purchase price. This may be a major concern when a security is thinly traded. It is possible that a decline in investor interest could trigger a sell-off of the asset in question, resulting in the investor incurring major losses at some later date.
The outcome of an investment analysis also depends on the investment preferences of the investor. For example, someone nearing retirement might not be interested in investing in a startup company for which there are reasonable prospects of significant growth several years in the future, since there is also a risk of losing the entire investment.