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The basics of business investing: What you need to know

There are rules that investors should follow in business investing. Some of these include starting early and investing what you can afford to lose.

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When business investing, you have the option of investing in your own venture or investing in businesses founded by third parties. Either way, there are some investment rules you need to adhere to if you hope to reap tangible returns if any from these investments. For instance, it is important that you orient yourself with the operations of the venture. You also need to master basic industry forecasting skills as these come handy in making futuristic business and investment decisions. Here are some other basic rules to investments that you ought to follow:

1. Start early

Most successful investors around, some of whom have started their own and well-performing investment firms started the trade early on in their life. And you should too. Starting early gives you ample time to learn all there is about investments and different industries without the pressure of pushing your investment to yield returns.

It also gives you chances for a comeback should you fail. The same cannot be said of individuals starting out the investment path later in their life. They have a myriad of obligations pressuring them to invest in safe ventures that guarantee quick returns so as to settle pending bills. Ideally, investments orientations should start with the gap year programs after high school.

2. AlwaThe pronoun ‘you’ must be used with a non-third-person form of a verb: “chance”chanceTurn off ruleys ask for the business plan

If you are investing in a new venture, insist on getting a copy of its business plan. Otherwise, how would confirm the feasibility of their business model. Confirm that the plan details all operational aspects and aspirations of the business as this helps you arrive at a more informed decision with regard to its likeliness to succeed. Be wary of businesses with unrealistic projections and overly optimistic entrepreneurs.

business plan

A business plan can help investors come to an informed decision when making an investment. (Photo by DepositPhotos)

3. Invest what you can afford to lose

Investments can be risky and history has shown that even the most optimistic investment options can fail to materialize. It is, therefore, a basic rule of the thumb when it comes to investing that you only invest the amounts that you can afford to lose. You should also avoid investing in highly liquid businesses that freeze your investment to a point that you can only recover the funds after selling it or turning to an initial public offering. The fact that you can afford to lose the investment doesn’t, however, equal a free card for reckless investments.

4. Conduct own business evaluation

The financial records can be cooked and business plans hyped by optimistic investors, thus the need to conduct an independent valuation of a given business before investing. Don’t just take the business owners word for it, research about the nature of the business and the industry in which it operates. Research on its prospects and the direction the industry is taking and confirm if the business has set up measures to adapt to any upcoming industry disruptions.

5. Figure out how to get your money out first

Don’t commit your money to a business without a clear plan on how to get your returns or a cash out plan. For instance, if you start a business from scratch, you can have the profits as the returns with cash out plan being selling the business or going public. When investing in other ventures like money markets or as a venture capitalist you need to first determine whether you will get returns in the form of dividends, interest or a share of the gross profit. More importantly, invest in businesses that have flexible cash out options. Don’t forget to check whether the returns are fixed or dependent on business performance and have it in writing.

Bottom line

Only invest what can afford to lose, conduct thorough research on business and have all your agreements in writing are the basic and often overlooked rules of engagement in investing. It is, however, important that you put them into consideration in every stage of your investment process as they may be the only thing standing between you and a poor investment decision.

(Featured image by DepositPhotos)

DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.

Robert Cordray is a former business consultant and entrepreneur with over 20 years of experience and a wide variety of knowledge in multiple areas of the industry. He currently resides in the Southern California area and spends his time helping consumers and business owners alike try to be successful. When he’s not reading or writing, he’s most likely with his beautiful wife and three children.

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