Investment Research: Benefits, Trends, and Types
February 24, 2022
Investment research is 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 both individual investors and investment banking companies 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.
Investment research is the time spent by investors studying and analyzing the performance of financial assets in order to create a list of well-performing assets.
The history of investment research
The very first stock exchange
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 get investment advice to learn which decisions 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 information coming from varied sources, known as alternative data.
Why is investment research important?
One of the main purposes of investment research is to allow investors to gain more knowledge about specific company information, may it be growth, stocks, technological advancement, and more. Once this data is collected, it helps investors build a more complete picture of the company’s performance and decide about an investment opportunity. 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.
Many investors tend to make financial 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. However, it's a poor practice in terms of risk management since sustainable investing requires thorough research and analysis.
Unfortunately, the dynamics of emerging markets can completely contradict such concepts. For instance, selecting stocks according to their size is not an efficient investment strategy as there is no indication of future performance. One example would be Kodak, along with many other giants that crashed despite their size.
Kodak's biggest mistake was turning away from new and evolving technology and trying to convince the competition that the film cameras were better than up-and-coming digital ones. They ignored all the media and market news altogether and crumbled down despite its size.
Other investors also expose themselves to a broad range of 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, such as family offices, know that they need to do their own research or choose data providers that are reliable, accurate, and professional. Independent investment research requires not only effort and time but also quality data inputs. The information can be then analyzed through scientific methods, such as statistical methods, algorithms, and more.
Investment research allows investors to gain more knowledge about specific company information, may it be growth, stocks, technological advancement, and more.
Benefits of investment research
Increased accuracy of business valuations
As mentioned before, investment research refers to asset management. Asset managers are responsible for making investment decisions on behalf of asset owners; therefore, research and analysis is required to accurately evaluate certain assets and make educated decisions. As a result, it supports the foundation of the 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 firms in the United States do not have public financial information available. In this case, investors leverage a combination of firmographic, technographic, company funding, 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.
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- See the sample structure of our firmographic JSON record
- Explore the main firmographic data points
- Find out the definition of each data point
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 risk, rewards, and other important aspects that will be reflected in your portfolio.
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 decision based on facts and data.
Also, you may want to keep in mind that certain funds may entail international, currency, or credit risk, as well as risky interest rates.
Investment research will help you become more confident knowing that all of your hard-earned money is invested according to your own research, knowledge, and on your terms.
There are six main steps that you can take in order to establish a sophisticated research process to make sure that all your investing-related decisions are well-informed and properly executed. See the infographic below for more information on those steps.
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 information.
2. Alternative data
Private equity and venture capital firms are looking for growth signals in early-stage businesses for more security. Sometimes financial metrics alone do not portray the full picture. As a result, investment professionals rely on alternative data to fill in the missing gaps of information in business performance.
This might refer to:
- Customer sentiment
- Headcount changes
- Employee distribution
- Funding rounds and amounts
- Seniority levels
- Web traffic
- Search trends
- Social media sentiment
- Product pricing
- And more.
3. Artificial intelligence and machine-learning methods
With such an abundant amount of information 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.
For instance, one major example of AI implementation in investing would be algorithmic trading. It is one of the most used tools in the financial industry. The algorithm consists of complex mathematical models that select theoretically profitable transactions without human interference.
Alternative data allows you to fill in the gaps of missing information to build a full picture
There are four most common types of investments: equity, cash and cash equivalents, fixed income, and commodities.
Let’s take a closer look at them.
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
Those assets include bonds, mutual funds, preferred stock, corporate bonds, and others. However, keep in mind that other mutual funds and assets, more beneficial for you specifically, might be available. 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 is saving money for it, 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 proceed. In this case, you should start with low-risk endeavors.
- The third stage is known as systematic investing. This means consistently distributing 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 entire process. Analyzing financial institutions for informational purposes allows you to better define your financial goals and improve overall investment intelligence.
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.
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