An investment is a commitment of funds for a period of time to derive a rate of return that would compensate the investor for the time during which the funds are invested, for the expected rate of inflation during the investment horizon, and for the uncertainty (risk) involved.
Investor will formulate investment plan based on risk and return objective together with personnel constraints, then derive required rate of return.
Once rate of return is determined, next is to look into investment strategy which included asset allocation strategy.
Through asset allocation decision, investor will determined analysis method to assist investment decision. Analysis method commonly used are Technical Analysis and Fundamental analysis to determine investment alternatives to generate required rate of return.
Technical analysis involves the examination of past market data such as prices and the volume of trading, which lead to an estimate of future price trends and, therefore an investment decision.
Fundamental analysis will involved making investment decisions based on the examination of the economy, an industry, and company variables that lead to an estimate intrinsic value for an investment, which is then compare to its prevailing market price.
On stock valuation, an investor must estimate a value for the investment to determine if its current market price is consistent with your estimated intrinsic value. To do this, the investor must estimate the value on an asset through valuation process and compare it with prevailing market price to decide weather the stock is a good alternative to buy.
The investment decision process can be compare to shopping for clothes, a stereo, or a car. In each case, you examine the item and decide how much it worth to you and its value. If the price equals its estimated value or is less, you would buy it. The same technique applies to stock except that the determination of stock value is more formal.
An investor starts investigation of stock valuation by discussing the valuation process. There are two general approaches to the valuation process
☺ The top-down, three step approaches
☺ The bottom-up, stock valuation, stock picking approach.
Both of these approaches can be implemented by either fundamentalists or technical analysts. The difference between the two approaches is the perceived importance of the economy and a firm’s industry on the valuation of a firm and its stock.
An investor, after determine the stock to buy base on valuation process, will continue to monitor the performance of the stocks, comparing the actual return against required return to determine either the condition as per investment plan is fulfill.
