Economic Analysis: In this analysis, the investor seeks to evaluate microeconomic as well as macroeconomic factors. Within microeconomic factors, the emphasis is on behaviour of individuals and their spending decisions at given price levels. Consumer demand is also analysed while microeconomic also includes study of firm, including costs, profits, competition.
To Understand behaviour of individuals understanding Behaviourial economics is paramount.
Under macroeconomic study, the analyses of the trend in unemployment rates, growth rates, inflation, investment rates, savings rate, consumption, income and other major macroeconomic variables that could impact the potential investments is undertaken.
It also includes study of fiscal policies developed by the Government as well as monetary policy by the Central Bank. And, the analysis also extends to international trade, exchange rates, trade deficits, geopolitical environment, global economy, especially nations with close relations.
Industry Analysis: Under this analysis, the investor emphasises on the trends in a particular industry and their impacts on individual companies. Industry analysis allows to gain valuable insights about the industry and understand the position of an individual company compared to its peers.
Michael Porter’s five forces model is a widely used template to study an industry. These five forces include: threat of new entrants, threat of established rivals, bargaining power of buyers, threat of substitutes, bargaining power of sellers.
Political, Economic, Socio-cultural, Technological, Legal and Environmental (PESTLE) Analysis is also widely used when evaluating an industry from an investing perspective. As the name suggests, this analysis is related to the study of all those areas that could affect the business.
Investors also monitor the regulatory developments in an industry because it is crucial to know the rules of the game. Also, there remains a possibility that change to regulatory environment can have a material impact on companies.
Company Analysis: In the analysis, the investor conducts research on an individual company and emphasises on specific details like business models, strength, competitive advantages, risks, opportunities etc.
It is important to know the cash-generation intensity of the business as well as how the company makes profit or what are margins of the business. What are the products or services of the company and who are the customers of the business.
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