Today, more people are getting involved in investment than ever before, even though it is as complicated as ever. The number of investment vehicles available is always growing and there has also been an increase in the number of start-ups coming to the market. In such an environment, how can you make good decisions about which investments to pursue and which to ignore, which to hang onto and which to discard? The possibilities can seem overwhelming, however, by sticking to a few basic rules you can find your feet in the world of investment.
Be wary of floats
Many investors take the plunge for the first time when a big name company is floated on the stock exchange. That can seem like a great opportunity, but just because it’s a big company that is likely to do well it doesn’t mean it’s not possible to pay over the odds for a stake in it. It can be very difficult to gauge the real value of shares in this situation. Furthermore, although an established company with some success behind it is more likely than average to remain stable, with a low risk of severe depreciation it might not increase in value, especially if it has already saturated its potential market. What you should be looking for as an investor is not so much success to date but growth potential.
Use your expertise
When you’re just starting out as an investor, you might not feel that you have much expertise to bring to it, but that’s not necessarily true. If you’ve worked for a business in the past, the chances are that you have some in-depth knowledge about the industry you were employed in. Although it’s a good idea to diversify in the long-term, there’s nothing wrong with beginning your investment career focusing on an area you know well. That will make it much easier for you to compare the investment potential of different companies.
Look to build relationships
Every individual investor has a different style. Some prefer to be hands-off and just focus on the mathematical side of investment, but the real success stories are usually those who put an effort into building relationships with the companies into which they put their money. Company owners often welcome this because it means that they, in return, can benefit from your knowledge, and you may share useful business contacts with them to help the companies grow. The better you get to know a company, the easier it becomes to analyze the risk it carries and to predict its future performance, helping you determine when to hold on – even through temporary setbacks – and when to let go.
Ditch the losers
The downside of building a relationship with a business is that it can tempt you to become sentimental, which is something no investor can afford to be. If things start to go badly and continue that way, with no sign of impending improvement, you have to be ruthless about selling your shares. To put it simply, there’s no point in throwing good money after bad, and although it can be tempting to keep waiting a little bit longer and then a little bit longer again for a company’s fortunes to turn around, it’s not something you can afford to do. To avoid a heavy loss, you should decide upon a stop-loss point that triggers you to sell when shares have slipped to a certain value.
Know when to stick with it
Just as some investors are too slow to pull their money out when things are going badly, others are too quick to sell when things are going well. Yes, you can make good money by selling shares you bought cheaply when they’re at a high point, but you can also make money by letting strong assets keep on growing if they have the potential to further increase their value. Don’t limit your options with a hard and fast rule about when to sell but focus on learning to measure potential.
Some investors have done very well by learning to identify those companies most ripe for investment and sticking with them as they grew. Sigurður Bollason has prospered through his investments in the fashion industry, while Richard Kerby has proved to have a keen eye for the fintech start-ups everybody’s going to take an interest in. Revathi Roy has used her investments to carve out an impressively powerful position in the logistics business in India, and Danielle Alexander is making a big impression in the field of assisted mobility.
What these successful investors share is an ability to consider what they’re doing over the long-term, avoiding hasty decisions and nurturing successful choices. With practice, you could join their ranks.