Investment Decision Making 1 Investment Information and Criterions Name of student: Admission: Course: Institution: Instructor: Date of Submission: Investment Decision Making 2 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 Investment Decision Making 3 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 Investment Decision Making 4 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
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