Investors and financial analysts have always been working with information to determine the best next move for themselves or their clients. But in the last decade, the sources for such valuable information have increased significantly in number and variety. Alternative data now provides analysts with many different opportunities to uncover insights that used to be beyond reach. Let us look at how it changed the financial industries.
Alternative approach to financial information
Traditionally, data used for the extraction of financial insights would be very directly related to finances and would usually come from the company sources. This would include press releases, SEC filings, and similar types of presentations of information to the general public.
However, we now live in a society that constantly produces and interchanges all kinds of information. This has changed the situation for financially relevant data in two major ways. First, now we do not have to wait for communications from company representatives to tell how it is doing financially, as there are many sources for this information. And second, we can arrive at insights relevant for investors from data that does not seem so directly related to the company’s financial stance.
Alternative data drives this approach to financial analysis, where relevant insights are found by looking at various behaviors of the company itself or the public. A popular example of how alternative data can uncover investment opportunities is satellite imagery data. By looking from space to the parking lots of stores, analysts can determine how actively customers are visiting those stores. Constantly full parking lots clearly indicate that a company is doing well way before such information can be read in financial reports.
This goes to show that there are many things one can look at when trying to make a well-calculated financial decision. Many of such ways of seeking out new insights are provided by the world wide web and technology able to collect data from there. The internet is full of valuable information and most everything that happens is immediately reported online. With such quantity and such speed of data, it is the most important place for investors and analysts to look at for opportunities and insights.
What alternative data can reveal
As we have seen from the example above, financial insights can sometimes be uncovered by looking at relatively unexpected places.
But after a moment’s thought, we would not be surprised that investment opportunities can be determined by looking at features of a company that are not strictly speaking financially. After all, everything in business is related in one way or another. That is the main idea behind alternative data – with good enough analysis, all data is valuable.
To make this point even more apparent, let us look at a few other types of alternative data and how analysts use it to uncover important insights.
- Online job postings data can be used to determine which companies are growing. Naturally, a firm that is doing well and is preparing for the next stage of its development will be hiring more employees for new positions. This can be a great indicator for an investor, that the company should be followed closely.
- Product review data from online sources is a great way to track public sentiment. By what people think about specific products and brands it is easy to tell which firms or industries are going up or down. Through further analysis of this data even more insights important for financial decisions can be revealed.
- Customer behavior can sometimes be predicted by looking at data that seemingly has no connection with business. Such events as disease outbreaks or specific weather conditions do not have to reach global proportions to have an effect on what and how people buy. Financial analysts and investors who track such information will be able to see what others do not.
- Company employee review data is also available on various online sources today. This is a great way to look at the inner climate of the firm. By how the employees feel about their job and prospects, investors will be able to recognize potential issues or strong sides of the company that may not appear on the pages of financial reports and other traditional forms of communications from the firm’s management.
More numbers to look at
Financial analysts are used to looking at numbers and figuring out what decisions for the future they point to. Traditionally these numbers were more or less directly related to finances. They were for revenue, profits, costs and assets, and other things that were manifestly tied to how the company is doing financially.
The main point of this article is that now we know that numbers do not have to stand for finances directly, to inform about the financial situation of firms or entire industries. There are many types of alternative data that can be just as, if not even more revealing.
This means more numbers for investors and analysts to look at and discover hidden insights behind.