What is Investing?
Investment activity focuses on the potential of an asset’s value to increase over a period. In the context of the securities market, the value of an asset can increase if it can generate higher cash flow without a proportionate increase in risk or if the risk associated with the asset decreases without a proportionate decrease in the cash flow. Investment activity is generally undertaken by investors with the aim of making a return on their investment.
|Active Investing||Passive Investing|
|Definition||Involves identifying specific securities to buy or sell, evaluating each security in the portfolio, and making decisions based on market conditions and individual company performance.||Involves investing in a broad set of securities that represent an asset class or index, and earning the rate of return that the asset class or index provides.|
|Approach||Requires a lot of research, analysis, and monitoring of individual securities, and attempts to generate returns that outperform the market.||Seeks to match the market returns by investing in a diversified portfolio of securities.|
|Strategy||Seeks to identify securities that are undervalued and have the potential to provide higher returns than the market average. Selling securities that are overvalued and reinvesting in undervalued securities.||Follows an indexing strategy, where the investor buys all securities that are part of an index or a basket of securities that represent an asset class.|
|Risk||Carries higher risk as it requires making frequent buy and sell decisions based on market trends and individual company performance.||Carries lower risk as it involves investing in a diversified portfolio of securities that broadly represent the market or an asset class.|
|Fees||Typically higher fees as it requires active management, research, and monitoring of individual securities.||Typically lower fees as it requires passive management and follows an indexing strategy.|
|Investor Types||Suited for investors who have a high risk tolerance, are willing to devote time to research and analysis, and seek higher returns.||Suited for investors who prefer a low-risk, low-maintenance investment strategy, and who are satisfied with market returns or the returns of a specific asset class.|
The Role of Research in investment activity
As an essential part of investment activity, fundamental research plays a critical role in informing investment decisions. The fundamental research analyst has two main responsibilities: (i) Research and (ii) Analysis.
The fundamental research analyst is responsible for researching the companies and industries they cover. This involves conducting comprehensive research on various aspects of a company, including its financials, management, industry trends, competitive landscape, and overall performance. The research analyst uses multiple sources of information, such as company websites, financial databases, industry reports, and analyst research notes, to obtain the necessary information for analysis.
Once the research is gathered, the fundamental research analyst analyzes the company’s performance and future prospects. This involves making sense of the data and using it to identify trends and draw conclusions. Based on the results of the analysis, the analyst then provides investment recommendations and advice to clients. Additionally, the analyst may provide commentary on market and sector developments.
Insider information is information obtained from people who are directly involved in the business operations of a company, such as employees, managers, and executives. This type of information is typically not accessible to the general public and is illegal to use for trading purposes.
Mosaic analysis is the process of using publicly available information to build a picture of a company or industry. This involves collecting and analyzing various data points, such as financial reports, news stories, and market trends, to gain insight into how a company or industry is performing. Unlike insider information, mosaic analysis is available to anyone with access to public data.
Technical analysis is a method of trading in which past price movements and trading volume of securities are analyzed to make predictions about future price movements. This type of analysis focuses on chart patterns, indicators, and other technical tools to identify trends and forecast future prices.
Fundamental analysis is a method of trading in which a company’s financial performance is analyzed to make predictions about future price movements. This type of analysis focuses on financial statements, such as balance sheets, income statements, cash flow statements, and more, to identify trends and forecast future prices.