Money begets money and if you believe in this fact, you will make investments. This serves as a basis for expanding your estate. While there are various types of options available on the market, you will have to consider your finances before you take the plunge. Risk calculation is a fundamental concept before you throw your money in shares and property.
Before you make an investment, it is essential that you ensure that your finances are in order because they involve some degree of risk. Chances are the investment fails to produce desired profits and you may be in a tight spot. Well, this basic ritual you will always run before making any type of investment. However, there are other things too.
Table of Contents
Things to bear in mind before buying stocks
Buying a stock is a great way to become well off in a short period although the idea of starting off can be intimidating. According to a study conducted in 2019, 2 million Brits have invested money in stocks and shares. Individuals own 12.4% of shares whereas overseas companies and people own 53.7% of shares. In fact, investment in stocks is so common that some people take out very bad credit loans with no guarantor from direct lender such as The Easy Loans, British Lenders, AOneFinance in the UK. They say that this additional income helps them paying off the debt on time. It results in credit score improvement and increases the chances of borrowing money in future with no guarantor.
Before you buy stocks and shares of a company, look for these three points:
• Business model
The business model company uses plays a paramount role in the profits of a company. Some companies use low-price strategy to attract mass audience and some use high-price to sell fewer high-quality items. There is no right strategy and a company cannot follow a particular strategy for long run because the market trends continue to change. Make sure that you understand the business model and you are certain that the company has potential to maintain high net worth.
A company must earn high profits to distribute high dividends to stakeholders. As an investor, you will want it earning higher profits every year compared to last few years. The reality is this mindset is not realistic. The demand of a product can never be static and so are the profits. Your goal should be it is maintaining the pace to withstand competition and not struggling to sell products.
• Debt-to-equity ratio
An ideal company is one that has debt-equity ratio 1:1 or less. The ratio explain the capacity of a company to pay off the debt when profits suddenly plummet. The rule of thumb says the lower the ratio, the better it is.
• Your reasons for investing
It is good to be an owner of a company but investment in stocks can be perilous if the base of your decision is wrong. You can earn high amount of dividends so long as the company’s value, profits and good management are the only reason.
Things to bear in mind before making investment in property
If you are planning to have a good amount of return, the real estate is the best option. Whether it is residential or commercial property, the prices continue to soar gradually and this will help you earn huge amount of profits over the time. Here is what you should look for before throwing money in property.
• Whether it is appealing to the market
You need to do proper research before targeting the location of your property. Make sure that it will attract both buyers as well as renters. Put aside your likes and dislikes and evaluate the value of property from your clients’ point of view.
• Consider maintenance and related expenses
If you are investing in a residential or commercial property, you will have to calculate how much it exactly costs. Your cost will add in not only the purchase price but also the operation and renovation cost. The sale price will include the total cost plus your profits. However, not all properties have the market price that allows you to recover your cost. Make sure that you do not completely block your money.
Other important tips
Whether you invest money in stocks and commercial property, the most important factor you cannot escape considering is the risk. All types of investment involve some degree of risk. Financial experts say the higher the risk, the higher the return, but each individual has different capacity to take it on. It is important you can lose some or all of your money, for instance, the company goes bankrupt and eventually the demand of the product drops down or the property prices plummet leaving you tied up with your property.
The bottom line
Though investment is a good way to earn extra money, you should calculate the risk you can afford as well as your finances. There is no guarantee that you will get high returns on every investment you make, but enough research can mitigate it.