Considerations Before Making Investments Essay
Investment has got a various number of definitions related to in which context it taken. In our case , we are going to take two contexts to give a definition to this term of “ Investment ’’ In Business Management , Investment can be defined as a tangible assets like equipments, machinery and buildings and intangible assets like patent, goodwill and copyrights . Making a decision for investment is known as capital budgeting decision, regarded as one of the important and key decision.
In Finance, Investment can be defined as the purchasing of financial assets and securities from capital market , or buying money market or real properties with high market liquidity. Examples silver, gold, precious items, real properties. Direct financial investments are in bonds, stock and others forms of security investment. Before making any investment, there are many things the company has to take in consideration .
It necessary for the company to know how the financial system is still working before investing money carefully , as investing is an important part of the financial planning process. 1. Understanding of law of “ Supply and Demand” Before making an investment in the stock market , the company should have a good understanding of law and economics principles . Supply and demand is very essential and something the company must know before investing money into the stock market correctly. When the demand of the products of the company is high , the stock price will probably rise.
If the company invest in something that offers products that are greatly used , the company is making a good and wise choice, but before all the process be taken , a deep investigation is necessary to check if the products offered will still stay continuously in high demand. 2. Quality Research A quality research is another important factor to consider when the company wants to make an investment. The company can show the image of a good and wealthy company where a good and safe investment can be made, but you must keep safe by doing first a real and vital research before taking any action.
Verify the annual report of the company and find about their operations, products, basic and services business track record. All these information can help to get an idea how stable the company is and how the company can offer profits to investors Some verification must be undertaken such as: -Financial history -Financial records -Stables assets -Positive cash flow 3. Diversification of Investments It is very safe for a company to invest to one or two targets. It compulsory for the company to spread investments in stock market .
Investing all into one thing may be very dangerous and it can happen that the company may goes under due to a certain reason ,and the stock price will decline and the company could lost everything. It a good strategy to diversify your investment by making a selection of variety of securities , diversification is able to reduce the risk a high level rate( 70%) of the total risk of investment. If all the money in put in one place , the return will depend only on the performance of that one investment, alternatively if investment is made in several assets , the return will depend on your various investment return.
Find below three basic means to diversify investment: * Choose a variety of funds and securities within one asset class, e. g. stocks from small , large , meduim companies in different industries. * Choose securities from a variety of asset classes, e. g. a mix of cash and bonds 4. Risk Consideration Investment involve some risks because one cannot know the future value of an investment. Risk implies simply the possibility for the investment to be lost. There are some factors which may affect risk level of an investment: * Interest rate change Inflation * Changes in the economy * Business failure 5. Take in account Investment Fraud The investment must be made wisely in order to avoid investment scams, each investment opportunity must be researched thoroughly and deeply . The company must get the facts before to invest , and invest the money that the company can afford to lose. To avoid investment scams , these following steps must be taken: * Check to data base if the investment is registered as many investments scams are unregistered securities.
So one should always find whether the company has registered its securities with appropriate financial institution. * Check if the person or company selling the investment is recognized or licensed by appropriate financial body. * Check amongst some important information as, recent reports of the company has filled with regulators, verify carefully the company’s financial statements, if the company says does not has been audited or certified by an approved accounted. 6. Time.
Another aspect to be considered before making an investment is the length of the time you own the company’s stock . The duration of the time that the company has been in existence and their stability must be also considered. These days, telecommunications companies are a good and great investment as services and products they are offering are looked for millions of people, electronic companies, energy and gasoline companies can be seen as reliable companies where investment can be made, but be carefully to check first the track record of any company before making or planning to invest in. . Payback Period Before making an investment, the company needs to look at the financial returns that this project is expected to produce during all the years of it life and compare all these to its cost and then look at how long the investment will take to payback its original cost. 8. Discounted Cash flow The company must take into account the time value of the money.
A return in several years is very worth a lot less than having the same return now, so future returns need to be discounted to see how they would be worth. Conclusion Decisions of investment are not made easily; investing requires much effort, investigation and courage. Investment has got its advantages and disadvantages, a choice must be made amongst a range of investment projects and comparison to evaluate which is the best.