Investment Decision Making

 Investment Decision Making
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Investment Information and Criterions
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In certain instances, investors are faced with competing investment opportunities, however, due
to scarcity of capital, they are forced to pursue the most viable investment. This is because
capital is a scarce resource, and therefore, investors seek capital projects that will maximize their
return on investments. Similarly, investment is a present sacrifice that investors take in order to
reap future benefits. Therefore, they will seek to put money in investments or capital projects
that promise higher monetary value than the present monetary value. For instance, a corporation
has retained earnings with a present value of £2, 000,000; however, investing these funds in, for
example, government debt instruments will yield a return of investment of 20% in one year. As a
result, the monetary value of the corporation in a year will have increased by 20%.
In the process of investing, investors, individual, firms and governments are required to make the
decision of whether to invest or not, and how to invest given a wide array of investment options.
Bryoles (2007) observes that investors are faced with numerous investment options; however,
due to scarcity of capital, they have to choose among available options. For example, an
individual might have to decide whether to invest in stocks, fixed income securities or real estate;
a government might have to decide whether to build a road, a school or a dam; a corporation
might have to decide whether to replace existing machines, expand the business or launch a new
product in the market.
Brigham and Houston (2007) observe that investors undertake analysis to make an investment
decision on the best available investment opportunity to pursue. The methods of analysis are
based on economic and mathematical principles. Using economic and financial techniques,
investors analyse financial information to arrive at the optimal investment decision. Analysis of 
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financial information on the available investment options helps minimize uncertainty of
investment. Fuss and Vermeulen (2004) highlight that investments face the challenge of
uncertainty, as it affects timing of investment and the level of investment. It is, therefore, evident
that the process of investing is mired with complexity. For this reason, this essay seeks to discuss
the information investors need to decide where to invest their capital and then to judge the
effectiveness of their investment decisions.
Information Aids of Making Investment Decisions
Investors before making an investment decision evaluate critically economic and financial
information that pertains to an investment. Evaluation of relevant information to an investment
help an investor assess risks and returns on investments. For instance, equity investors analyze
economic fundamentals of a company before they invest in the stocks of that company, in what
is termed as fundamental analysis. According to Jones (2009), fundamental analysis helps
investors evaluate the future financial outlook and investment prospects of the company.
Fundamental analysis evaluates three layers of information that directly or indirectly affects
investment performance of a company. The first layer of information is macroeconomic
information that include inflation, interest rates and economic policies. The second set of
information pertains to the industry outlook in which the company operates and include industry
specific material information such as regulations in the industry, weather patterns among other
factors that affect the sector in which the company operates as a whole. The third level of
information that is evaluated by investors during fundamental analysis is company specific
material information and includes information such as profits for the company, management
expertise of the company, corporate governance, strategies and other material information that
affects financial performance of a company. Due to the key role that financial and economic 
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information plays in the process of making investment decisions, Ogbonna and Ebimobowe
(2011) observe that it is for this reason that listed companies are required by law and regulations
to prepare and present to the public financial statement and reports that are truthful, complete and
unbiased on any material information. Similarly, other investors such as governments and firms
rely on financial and economic information in making investment decision. Just like individual in
making investment decisions, misrepresentation of material information leads to poor investment
decisions.
Investors require projected financial performance of an investment to determine its viability.
According to financial practitioners and investor