Invest in Businesses You Understand
One of the biggest mistakes that a lot of people make when buying stocks is jumping in and buying the first thing they see or understand. This can get them into trouble.
Make sure you do a little homework before you invest in stock. Research the company thoroughly and know what you are getting into. Also, you should not buy stock in the same way as you might purchase a car or a house. Buying a car or a house is a one-time deal, but you are going to be looking at buying and selling your stock portfolio over and over again.
When you buy a car, you will not keep it for years without selling it. You might buy a house and sell it after a few years. You certainly don’t want to go through this if you buy stocks. Each time you sell your stock, you have to pay a tax. The first time you buy the stock, you would be paying capital gains tax. Instead, when it comes to buying, keep your stocks for as long as possible to avoid paying a lot of taxes.
Take your time to learn what you are doing. Do your due diligence and buy stocks that you know and that have a good record. The more you are committed to it, the better your chances of becoming profitable in the stock exchange market.
Great Products Don’t Necessarily Make for Great Investments
If you asked people to name the companies that originated household products, most of the responses would be instantly recognizable, including names like Hoover, Hershey, and Procter & Gamble.
These companies are famous because people actually use their products and include them in their daily lives. It was an effective combination of market success—and often times, even superior products—that allowed these businesses to penetrate consumers’ minds.
These companies are also some of the most discussed investments of all time — after all, their businesses have been around for decades and their products are relied upon both domestically and internationally. This familiarity and notoriety has led to the quick jump to the assumption that they “have to be profitable investments.” Sadly, that’s far from true.
Now, before we get into the details, it’s important to note that these companies are well run and extremely profitable, but that’s not an indication of success in the financial markets. Simply being a quality company doesn’t guarantee you a profit in the financial sector. The products you purchase from these businesses are likely used for their intended purpose; but will the company produce profits for its shareholders?
If You’re Wrong, You’ll Lose Your Investment
By buying stocks and bonds, you are making a calculated gamble. You are either betting that the value of the securities will rise or you’re betting that their value will fall.
If you decide to buy something which you think is going to go up in value, but it doesn’t, then you have lost out on an opportunity.
This is true of any investment, but most commonly when it comes to buying stocks and bonds. If the value goes up, you gain a nice return, but if the value goes down, you can potentially lose. Normally, bonds and stocks have a price dictated by the security and the value of the company that they represent, but there have been times when a security has depreciated in value and the market has over reacted.
For example, if you hold company A’s stock and that company reports a higher than expected loss for the quarter, the stock price will drop since you believe that the company is not doing as well. So, even though the company’s stock price may not have been affected by the new information, the market could remain modest on the stock of company A since the market believes that there may be more bad news on the horizon.
Think of it as Buying a Small Business
Let’s look at an example.
If you buy 100 shares of Johnson and Johnson stock today, they will most likely be worth more in 5 years. But that projection is only an estimate of what your investment might be worth in the future. It is not a guarantee.
Now consider investing in small businesses. Many small businesses have a great idea. Their products may have already proven to be popular. All they need is some funding to ramp up production and get their business rolling.
They need to pay rent on their building. They may need to hire more employees. They might need more inventory. The list goes on and on.
When you invest in a small business, you will get a part ownership, or equity. When your new business starts to flourish, you will start making money. The money may come in the form of profits, or it may come in the form of a dividend distribution from the company to its shareholders.
If you are lucky enough to invest in a small business that produces a lot of value, you will very likely get paid handsomely for your investment. Unlike stocks and bonds, the value of your investment in a small business is not a prediction.
You know that the business will make money. It may take a while to get up and running. It may take a while to start making a profit. But the business you are invested in will definitely make money.