What is Investment Research?
June 14, 2021
Investment research is defined by the Financial Times as the time spent by investors studying and analyzing the performance of financial assets in order to create a list of well-performing assets. In other words, it is a preliminary stage in investment in which individuals search, find, and study information related to stocks or other assets to find investment opportunities. Let’s find out more about the crucial role investment research has on investing.
The history of investment research
Investment research has a long history. Ever since the first stock exchange was established more than 400 years ago, the Amsterdam Stock Exchange, investors could access information and consult advisors to learn which investments to make.
A few centuries later, in the 20th century, the stock market became more popular. Banks started to send investment research to their clients through the mail. This information was aimed to solve investors’ problems, such as information inaccuracies and fraud.
Since the 1980s, many advanced research portals were created, including Bloomberg. This is how investment research has become extremely important for investors as a method of collecting accurate and reliable data so that the global investment research market passed the $16 billion mark in 2017.
In the 21st century, investment research is constantly evolving. This is due to the greater availability of data, breadth, variety of sources, and multiple analysis methods. For instance, emerging technologies such as artificial intelligence allow investors to analyze a larger amount of data coming from varied sources, known as alternative data.
Why is investment research important?
There must be sound reasons why investment research has played such an important role in investors’ decisions ever since the first stock exchange was established. One of the main purposes of investment research is to allow investors to gain more knowledge to make better-informed decisions.
Many investors tend to make investment decisions based on common beliefs or theoretical assumptions, such as growth means high risk, efficient market theory, or value stocks versus growth stocks. These common assumptions and theories aim to speed up the decision-making process.
Unfortunately, the dynamics of today’s markets can completely contradict such concepts. For instance, selecting stocks according to their size is not an efficient investment selection tool as there is no indication of future performance. One example would be Kodak, along with many other giants that crashed despite their size.
Other investors also expose themselves to information obtained through methods of authority. In this case, individuals make investment decisions based on what other authoritative sources, such as news media, recommend without doing their own research. In this case, investors are heavily exposed to biases and external influence.
Long-term investors know that they need to do their own research or choose data providers that are reliable, accurate, and professional. Investment research requires not only effort and time but also quality data inputs. The data can be then analyzed through scientific methods, such as statistical methods, algorithms, and more.
Benefits of investment research
Increased accuracy of business valuations
According to the definition above, investment research refers to studying financial assets to make investment decisions. As a result, one main benefit of this process is that it supports the foundation of your investment process: business valuation.
Although there are numerous strategies and approaches for business valuation, investors now use sophisticated methods to conduct this critical stage, such as analyzing alternative data using computer models, along with traditional data.
For instance, many private companies do not have public financial information available. In this case, investors leverage a combination of firmographic, technographic, social media, and other alternative data types to conduct a financial evaluation on the prospect. This information is often supplemented by traditional data, such as public financial releases and public information. For public companies, investors can use alternative data to calculate the value of intangible assets, including brands.
Improves confidence and peace of mind
When your investment decisions are based on intuition, guesswork, or others’ recommendations, you are likely to experience distress. This is because you may not fully understand the investment’s risk, rewards, and other important aspects that will be reflected in your portfolio.
Investment research will help you become more confident and enjoy peace of mind knowing that all of your hard-earned money is invested according to your own research, knowledge, and on your terms.
Knowledge is power
It is a well-known fact that knowledge is power; in other words, you are more likely to enjoy the returns you expect when all of your investment decisions are based on cold facts rather than intuition or guesswork.
Many investors tend to make rushed decisions, but these will be highly likely to underperform. Instead, experienced investors know that they need time to focus, research, and make each investment decision based on facts and data.
Investment research trends
1. The focus on investment research
Perhaps one of the most prevalent trends in this field is the increased focus on investment research. As the pandemic started to affect all economies in 2020, investors were challenged by uncertainty, market volatility, and, subsequently, great risks of losing their investments.
Many people focused more on researching stocks to invest in, what companies may benefit from the pandemic, and what industries are safer. This trend is likely to remain in the future, especially as investors have started to demand higher-quality, detailed data.
2. Alternative data
In the search for more security, investors have turned their attention towards alternative data. This might refer to web traffic, search trends, social media sentiment, product pricing, and many more.
Both institutional and non-institutional types of investors employ these data. For instance, a survey showed that 69% of market leaders use alt data to outperform the market, while 23% use alt data to manage their risks.
3. Artificial intelligence and machine-learning methods
With such an abundant amount of data we can find online, investors can be easily overwhelmed. One of the main trends refers to the adoption of emerging technologies, such as artificial intelligence, in order to be able to collect and analyze all of this information.
This is because technology allows investors to automatically interpret structured or unstructured information and find new patterns and trends on which they can easily capitalize. The surge in alt data usage is undoubtedly associated with a similar surge in AI adoption, so investors can quickly obtain actionable insights from large datasets.
There are four main types of investments: equity, cash and cash equivalents, fixed income, and commodities. Let’s take a closer look at these investment types.
Equity refers to a growth investment ideal for medium- to long-term strategies. These represent company shares you can buy on the stock market.
2. Cash (highly liquid assets)
Cash and cash equivalents refer to highly liquid, short-term assets. These may represent different money market instruments, such as T-Bills, certificates of deposits, and others. These assets are similar to cash; they come with low risk and low return.
3. Fixed-income assets
Fixed-income assets investments include bonds, mutual funds, preferred stock, corporate bonds, and others. These provide the investor a fixed income over a certain period and come with a lower risk profile than equity.
Finally, a commodity refers to investing in basic goods, such as oil, grains, beef, oil, gold, and many more. Nowadays, the definition also covers other products, such as indexes, foreign currencies, and even entirely new types of goods, such as bandwidth.
It is important to note that because of technological advancements, there are additional investment types available. For instance, investors now have access to cryptocurrencies, futures, real estate, and others.
The major stages of investing
- The first stage of investing is saving the money for the investment, along with a put-and-take account. This account should have approximately six months’ worth of your net pay for emergencies and daily expenses.
- Once you have enough money to invest without running out of daily necessities, the next step is to start investing. In this case, you should start with low-risk investments.
- The third stage is known as systematic investing. This means consistently investing a certain amount of money every pay period.
- The next stage is known as strategic investing. This means to start balancing your portfolio using diversification. Typically, people in this stage set goals for the next decade.
- The fifth stage is not very common among individual investors. It is known as speculative investing, a stage that comes with the highest risks and highest gains.
All in all, investment research is a crucial stage in the investment process. It aims to help investors determine which financial assets fit within their investing strategy using facts and data. The main benefits of investment research are decreasing uncertainty and outperforming the market using available data.
Frequently asked questions
Where can I find investment research?
There are numerous sources for investment research. However, it is important to avoid the method of authority as explained above. Most investors prefer investing in quality data providers and conduct their own research. Alternatively, you may choose an investment research provider that is reliable, accurate, and always up-to-date, such as Bloomberg.
How do you study investments?
There are numerous ways of studying investments. Novices may want to start with basic research tools and analysis, such as price charts, past performance, or resistance levels. Depending on your knowledge and abilities, you can study investments by corroborating a broad variety of relevant data, such as social media information, news, firmographic data, technographic data, and more.
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