There are many benefits to investing in a company. Watching your money grow by holding shares can be incredibly rewarding. But at the same time, there are no guarantees this will happen.
Simply put, some companies will make returns for investors, others may not. It’s your job to evaluate companies on merit, applying due diligence to make sure it aligns with your wider financial goals.
Those who invest in individual companies should always keep top of mind that, when they invest, they acquire shares of ownership in those companies. Like buying anything, it is wise to fully understand what it is you are getting into first. For example, you wouldn’t buy a house without viewing it first. The same rules apply to buying shares in a company.
Investors succeed when they understand the companies they buy into – and the industries in which they operate. But it’s also much more than this, and investors should build upon that foundation.
They should do their homework on all the companies they are looking to invest in. Dive into each company’s financial reports. Public companies are required to post results every three months. You can also listen to investor calls, when management teams discuss the financial health of the business. For private companies and start-ups, it’s not as simple. But there are still ways you can get your hands on important financial information.
Additional considerations: Is the company in a solid financial position? Is it in an expanding sector or market with strong demand for products and services? Is there a long-term plan for revenue growth, expense control and, ultimately, consistent profits? Does it have a proven management team? There is a long list of questions you can ask yourself.
Investors must also assess price – looking for an opportune time to buy into a company, so they increase their chances of getting a good return on investment. But keep in mind that cheap is not always good when it comes to stocks. Sometimes, a stock price is low because the business is slowing or otherwise under pressure.
On the other side of that coin, expensive is not automatically bad. In some cases, a stock carries a lofty price because there are high expectations for future growth and, by extension, there is room for continued increases in the stock’s value.
Bottom line: Due diligence is vital. Do your research. Understand what you are buying into and how well each stock matches up with your specific return on investment expectations. Also, diversification is often a good strategy. As the old adage goes, don’t put all your eggs in one basket.
*Nothing in this article should be considered legal or investment advice. Startup investments are always inherently risky and following the advice in this article will not necessarily reduce that risk.