I had to face a situation where the capacity of the Instance was not enough for the task it has been assigned! So what we planned was to increase its Instance Type to get a higher CPU.
To start off with the task I took a snapshot of the Instance, ( I will be publishing the steps of taking a snapshot)this is to be in the safe side so if anything goes wrong we will be able to restore the AMI Image and launch the instance. After I have taken the snapshot, I will be stopping the instance, without stopping the instance you will not be able to change the Instance type.
Select the EC2 instance → Instance State → Stop
Now wait until the instance is stopped, it might take a few minutes to stop and it will be listed in the EC2 instance list remove any filters if there is any (running filter in the search bar of EC2) or filter by stopped instances to view it.
Now select the Instance that needs the type to be changed → Select Actions → Instance Settings → Change Instance Type
After you have got the window shown above, It will show the instance type, Select the Image Type and Click on apply.
You will be able to change the insance type according to your requirements likewise, this means both upsizing and downsizing is possible!