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Investment Analysis 101
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Glossary of Investment Analysis Terms & Definitions
20 key terms related to investment analysis
The term ‘industry’ is used to collectively classify a set of companies that provide similar products or services. It refers to a group of companies that function in a similar sphere of business.
A sector is effectively a group of related industries. It is a segment of the economy within which a large group of companies are identified and categorised. An economy consists of multiple sectors, which together account for nearly all of the business activity in that economy.
3. Industry analysis
Industry analysis is a kind of investment research that aims to identify the industries that offer the maximum potential for your investment to grow. It includes the process of making investment decisions based on what stage of its life cycle an industry is in, at a given point in time.
4. Company analysis
Company analysis is a process carried out by investors to evaluate the profitability and investment potential of a company. It includes various aspects like assessing the company’s profile, its products and services, its goals and values and the company’s history, among other things.
5. Financial statements
Financial statements are formal records of the financial activities and the position of a business, person, or other entity. In the financial statements, all relevant financial information is presented in a structured manner that is easy to understand and analyse.
6. Profit and loss statement
The profit and loss statement records the company's financial performance in terms of the net profit earned or the loss incurred over a specified period, which is generally 12 months. This statement has two main elements: income and expenses.
7. Balance sheet
A balance sheet is a financial statement of the assets, liabilities and shareholders' equity at a specific point in time. It provides an insight into what a company owns and owes, as well as the amount invested by shareholders.
8. Cash flow statement
A cash flow statement provides information about all the cash inflows a company receives from its ongoing operating, investing and financing activities. It also shows all the cash outflows that pay for these three kinds of activities during a given period.
9. Notes forming a part of financial statements
The notes forming a part of financial statements are used to make important disclosures that explain the numbers shown in the financial statements of a company. These notes give you additional details and breakups of the various items contained in the profit and loss statement, balance sheet and cash flow statement.
10. Annual report
An annual report is a comprehensive report on a company's activities throughout the financial year. It consists of both quantitative and qualitative information that gives shareholders and other interested people insights about the company's financial and other activities.
11. Corporate Social Responsibility
Corporate social responsibility (CSR) is a company’s commitment to manage the social, economic and environmental effects of its operations responsibly. It is an evolving business model that incorporates sustainable development into a company's business and operational activities. The annual report of a company generally has a section dedicated to CSR.
12. Management discussion and analysis
This is a segment of the annual report wherein the management of a company explains how that company performed over the past year, both financially and otherwise. It may also include the management’s projections for the coming year.
13. Analyst reports
Also known as research reports, analyst reports are documents prepared by experts with a view to offer some guidance to investors about whether or not to invest in specific companies, industries, or sectors. These reports may focus on the recent financials of companies and their predicted share price movements.
14. Stock recommendation
This is a section in an analyst report where the analyst rates the company’s stock and offers a recommendation about whether the investor should ‘buy’, ‘sell’, or ‘hold’ the stock of the company. In addition to the stock recommendation, this section also carries with it the analyst’s expectations regarding the stock price targets, stop loss targets and the time frame for those targets.
15. Investment rationale
This is a segment of an analyst report that seeks to explain the analyst’s reason for arriving at the stock recommendation mentioned above. It gives investors a deeper insight into the thinking and analytical processes of the stock analyst. Since the techniques for analysis may differ from person to person, this section essentially justifies the analyst’s conclusion.
16. Historical price information
This is essentially data and information pertaining to the prices of stocks over the past few months or years. Historical price information can be obtained for various time periods, such as the previous 6 months, the past year, or the past 5 years, among others.
17. Efficient Market Hypothesis
The efficient market hypothesis (EMH) is a theory that states that the prices of share reflect all information: historical information, existing publicly available information, new publicly available information and private information. It has three variations: the weak form, the semi-strong form and the strong form.
18. Weak form of EMH
The weak form of EMH is one of the variants of the efficient market hypothesis. It claims that all past prices of a stock are reflected in the current stock price. It also suggests that technical analysis cannot be of any help in analysing investments.
19. Semi-strong form of EMH
The semi-strong form of EMH form is another variant of the efficient market hypothesis. It assumes that a stock’s price movements reflect all material information that is publicly available. It goes on to suggest that fundamental and technical analysis are of no help in predicting a stock's future price movement.
20. Strong form of EMH
The strong form of the efficient market hypothesis contends that all information, including the information available to the public and any information that may not be publicly known, is completely accounted for in the current prices of stocks. So, it suggests that there is no type of information that can give an investor an advantage over the market.
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