The Finance Professor
Investment Research: Ignore the Ratings, Read the Reports
09/07/07 - 06:05 PM EDT
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Investment research seems to be everywhere -- both online and off -- but what is it? At its core, this investment research is financial analysis performed in order to derive an actionable investment recommendation. These research-based recommendations (issued in formal written reports) constitute the basis of broker
solicitation for the buying and selling of securities.
Financial analysts ' actions are well publicized, and as a result, their recommendations can significantly impact security prices and your investment portfolio. So here is The Finance Professor's primer on investment research.
Price Moves
Typically, in the short term, the market's reaction to analyst research tends to be immediate and binary. In other words, if an analyst upgrades his or her opinion of a particular stock, then the stock price will likely rise, and if they downgrade their opinion, then the price will most likely fall. This is akin to the first point in "Five Missteps to Avoid in Earnings Season." As with an earnings report, initially, the market will react (either up or down) to a headline, but once everyone digs into the details, they are able to discern a better investment strategy.
Types of Research
Investment research comes in several different styles. Here are the more popular types of research:
-
Fundamental research (see fundamental analysis )
- Technical research (see technical analysis )
- Market strategy: This type of analysis looks at macro-level trends in order to identify investment strategies. Often they will provide asset allocations and identify sectors for opportunistic investment or avoidance. Some companies will have a single market strategist while others will break up those roles into asset classes , such as fixed income , equities and commodities .
- Economic research: Many research teams employ economists that provide economic analysis. They will research and publish opinions on many economic data points that investors keenly focus on, such as gross domestic product, or GDP , non-farm payrolls or consumer price index -- CPI .
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