Every investment comes with some amount of risk attached, but the rewards can seriously outweigh this, provided you approach it wisely.
While it’s always sensible to diversify your assets and consider your long-term aims, the bulk of your investment planning should focus on research. Armed with knowledge about a company or individual, you can enter into an investment with confidence – and avoid any big disappointments down the line. Here are a few initial steps which should put you on the right path.
Avoid systematic risk
Before honing your research to individual companies, it’s good to look at the systematic risk – or the economic situation as a whole. Investing during an economic downturn is obviously going to be more risky, so get a good idea of the bigger picture by reading economic blogs and news pages, monitoring things that might affect your cash such as interest rates and inflation, before moving onto industry-specific journals to give some context to your potential investment.
Investigate a company’s credit
One of the most important areas you should research is the financial status of the company you wish to invest in. Avoid investing in a business with a bad credit or track record by looking into their history and annual reports. You can obtain basic information for free from websites that search Companies House direct and as a result, determine how viable a financial investment the company really is.
Look at the price to earnings ratio
The price to earnings ratio – or P/E – is an important calculator of risk on the stock market. It literally divides the stock price by its annual earnings and by looking at the P/E for a certain share, you can determine whether it’s worth going forward. If the number is higher than others in the industry, it usually means a higher risk. This information can be found via financial sites for free and you could even seek out the P/E for a particular index to compare your company’s figures. To do this, you may need to consult the index directly, by looking on the Dow Jones website, for example.
Determine the management risk
Of course, a company is about more than its data or even its earnings growth. Make time to look at the individuals involved in running the company you want to invest in. You can do some digging on managers by searching business networking sites like LinkedIn or Twitter. Simply knowing a bit more about their background, dealings with others and public image will help you to make a more informed decision.
The bottom line is always about risk management. You can achieve a good level of this by researching your potential investment, but remember to also consider your personal financial goals. Do you have some time to save up for the future, or are you likely to need the money for property or educational fees in the next year or so? Try to balance risk proportionally to the amount of money you’re putting in, as well as your needs, and this should ensure you don’t suffer any sleepless nights over your investment.