In a world where investments decisions that involve Forex trading, stocks or other forms of trading activities are among the most important decisions undertaken by a person in a entire life, a good investment decision can make the difference between rich and poverty, between a retirement filled with travel activities and one impoverished and lacking any joy.
Usually, these decisions involve the commitment of large amounts of money, maybe the life savings and therefore they will affect the life of that person over a number of years.
Because the investment benefits are based on future events and the ability to foresee the future is more or less imperfect, any person who wants to invest should make a considerable effort to evaluate investment alternatives as thoroughly as possible. The most important task of investment analysis is gathering the appropriate data.
Selecting investments that will improve the financial situation of any person involves two main fundamental tasks:
i) Economic profitability analysis;
ii) Financial analysis.
Economic profitability will show if any other alternative is economically profitable. However, an investment may not be financially feasible ? you should discover this through making an in-depth financial analysis of each investment options you may have: currency trading, providing capital finance to a start-up, stock market, investing funds.
Therefore, you should complete both analyses before you make a final decision to invest in a specific direction.
Economic profitability analysis
The purpose of an economic profitability analysis is to determine whether the investment will contribute to the long run increase of your personal wealth. Although various techniques can
be used to evaluate alternative investments, including the internal rate of return, commonly accepted technique is net present value, otherwise usually known as ?discounted cash flow.?
The basic concept of a net present value procedure is that a dollar or any other currency in your hand today is worth more than a dollar to be received in the future. A dollar is worth more today than tomorrow because today?s dollar can be deposited in a bank account and can generate a certain earning per year. In addition, the inflation makes a future dollar less valuable than a present one.
This discounting procedure converts the potential revenues into a single value so that alternative investment opportunities can be compared on the basis of a single indicator. This conversion will help you understand which investment opportunity is the most suitable for you, considering all the economic indicators and also your auto-imposed level of accepted risk.
Financial analysis
Once you have analyzed the profitability of various investments opportunities and chosen the best option, you need to evaluate its financial feasibility. Financial feasibility analysis determines whether or not the investment will generate sufficient income to make the principal and interest payments on the same amount if borrowed from a financial institution.
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