Any time you are planning on investing in a stock or financial plan, you are devoting more than just your money. There, you are dedicating your time, resources, efforts, and funding to achieve a greater goal. In essence, it is more than just a piece of paper. It is a representation of you becoming a part owner of a new entity. When investing in a company, it is imperative that you do your due diligence before making any type of serious commitment. Any spur of the moment actions could lead you into a very unfavorable situation. Below, I have outlined a variety of helpful tips that can help ease you into making the right decision. Remember, investing is a gamble and a risk. So to do your homework is really the only option when making your decision.
So what is the homework?
Especially when I bring up the word homework, many people immediately think of long hours reading and analyzing data. One thing is sure, they are not wrong. When I talk about homework, I am talking about the history and financial statuses of the company you are planning on invest in. Having a strong holistic view of the company and its background will lead you in becoming more confident about your decision. Imagine that you didn’t do your homework and that you decided to invest because of a friendly tip. While beneficial at times, this is an incredibly risky move. Going into a company and making any type of financial commitment is basically a gamble. At one end you can hit the mother load and reach your financial goals. At the other end you can be facing a financial crisis and losing more than just your investment. Because of this risk, because of this gamble, I highly recommend that you do your due diligence and analyze the overall situation before making the leap.
Start off by researching the Chief Executive Officer. The Chief Executive Officer (CEO) is the most senior corporate administrator or executive in charge of managing the overall organizations. When you research him, make sure that this is a person who can represent the company in the best way possible. Validate their vision, goals, and leadership and decide whether or not it aligns with your future goals. In most cases, any concerns or worries about a CEO can completely compromise an entire company and cost them millions. To make sure that the company has the right leadership as you the following questions:
- What is the CEO’s vision and goals for the company?
- What direction is the CEO leading for the company?
- Do I believe in the same values and principles that the CEO is pushing for in the company?
- Does the CEO of the company have the right credentials and experience to put the company in the right direction?
- Where does the CEO see the company in the next year (five years, ten years)?
After analyzing the company’s leadership, start examining the company’s business model. A business model or business plan is an abstract representation of the entire organization. This breaks down the overall strategy the company will use to maximize its profits in its industry and field. In this business model, the company should have a strong sense of its goals on a timely fashion. If they do not have these steps outlined, note that in your head and ask for later. Having a steps and goals in a timeline manner will help you assess where you can begin seeing return. Similar to the CEO section, you also need to begin asking some hard-hitting questions about the company.
- What is the company’s goal? Where does it see itself in one year (five years, ten years)?
- What were the financial trends in the company?
- How is the overall work culture? Is there a lot of turnover?
- What are company’s steps in moving forward in the future?
- Highlight and question any unwelcoming trends such as low revenue / sales or high cost and expenses
Having this holistic view and history of the company will put you in the right place to make a decision.
The next thing you need to assess are the financial aspects of the company, this being the: profit margins, revenue, and cost. Analyzing these important numbers will solidify your decision in whether or not you should invest in the company. These valuations provide an overview of what you could potentially be seeing in the next coming years. One tip when analyzing data is to not be fooled by only one-year growth. This could have sporadically happened because a variety of factors. When you analyze these numbers, make sure you have the overall breakdown of the past five years. This will allow you to gage all positive or negative trends that you could potentially see later on in your investment.
Now if you are still uncertain about making your decision, talk to a financial advisor or your accountant. These are professionals who can provide you the best advise for your financial situation. Furthermore, they will be able to break down all of the necessary information and financial jargon that you may have trouble with during the initial meeting when you were first asked to invest.
So there you have it. Before you invest, do your homework. This ounce of effort will separate those who make money from those who lose money.