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Investors need to get familiar with certain tools that can provide them with an edge in the financial market. One such tool can be alternative data. Here’s a guide to help you understand all you need to know about alternative data, their types and sources, and why turning to non-traditional analysis is important.
Analysis and investment go hand in hand. Before venturing into a stock, investors check data obtained by conducting a certain financial analysis and turn to alternative data sources to help them gain an edge over the broader market in situations when the strategies in place tend to pose higher risks.
Alternative data often act as a haven for investors, establishing their confidence in a more productive market. The guide below will provide everything for a better understanding of all that alternative data are about, and tell more about the types, sources, and obligations of alternative data in financial analysis.
Alternative data can simply be defined as an unconventional form of data used in financial analysis. Unlike the traditional methods of generating finance-related data like the earnings report, alternative data takes a more creative approach to be generated. In essence, alternative data are not generated by the analyzing company or brokers. As such, investors have to take extra steps and seek alternative data from non-traditional sources.
Alternative data get such a name because they do not come from the usual sources like company reports, earnings calls, or broker notes. Instead, it includes things like internet comments, weather predictions, satellite images, data from IoT sensors, employee benefits, and corporate jet movements. This kind of data might not be easy to find, however, it can help to gather extra information about companies on the stock market.
To help investors secure an edge over the broader market and help them fight competition while optimizing their chances of making more profits, alternative data provides them with essential information in unusual ways. This brings us to the types of alternative data, the classification below is based on different sources of obtaining them.
Alternative data is generated via various forms, each with its advantages and drawbacks. Data from sensors or individual actions are often affordable to obtain but usually require extensive processing to become useful. In contrast, data from business activities are easier to work with but tend to be more costly.
Furthermore, sensors like satellites and surveillance cameras gather location-based data, including weather conditions and images from different angles. They can also monitor factors like the number of people in a specific area. Everyday actions such as social media posts, product reviews, surveys, and app usage generate a wealth of alternative data that can be valuable for businesses and investors. Furthermore, company operations can unintentionally produce data, like transaction records and publicly available information on websites, which can be harnessed for insights.
As mentioned earlier, alternative data encompass a wide range of information, including web and foot traffic, credit card transactions, social media data, supply chain details, and even weather reports. This sets them apart from traditional data sources, which are typically more limited.
When comparing alternative data to traditional data, several key criteria come into play:
The role of alternative data in financial analysis is significant.
Firstly, alternative data come with time and resource efficiency. Collecting, cleaning, and analyzing data can be time-consuming and resource-intensive. A team of data experts can use alternative data to perform these tasks more efficiently, allowing the business to focus on its core functions.
Secondly, turning to alternative data can bring a competitive advantage and provide valuable insights and strategies that set the business apart from the competition.
However, alternative data come with complexity. Non-traditional data are often messy and come from diverse sources, demanding special skills to clean, process, standardize, and analyze effectively.
Investors need to pay attention to alternative data. When we invest in stocks, we’re essentially betting on a company’s future earnings and growth. As such, having more knowledge is essential because it increases the likelihood of making informed investment decisions.
Using traditional data like financial statements is important for stock analysis, but it mainly looks at the past and might not give the full picture. To truly gain an advantage and enhance our chances of making profits, we need to go beyond traditional data. This is where using alternative data becomes valuable. When used correctly, data from non-traditional sources can provide a more comprehensive view of a company and its potential.
Alternative data can simply be defined as an unconventional form of data that is used in financial analysis. Unlike the traditional methods of generating finance-related data like the earnings report, alternative data takes a more creative approach to be generated. In essence, alternative data are not generated by the analyzing company or brokers. As such, investors have to take extra steps and seek alternative data from non-traditional sources.
Types of alternative data include transaction data, web data, location data, satellite data, property data, social media data, etc.
Alternative data is taken from unconventional sources like social media, geographical location, transaction records, surveys, and lots more.
Alternative data are important to investors because they help leverage competitive market conditions and provide investors with an edge over the broader market.