Choosing The Right Investment

The above phrase is probably one of the most difficult issues confronting investors, which investment do I choose and why? After all, the goal is to preserve one’s capital, but at the same time also enjoy some higher returns while taking some calculated risks.

The first thing to decide is the type of investment, to invest in the shares of a company or earn a fixed income by investing in the corporate bonds of the company.

When investing in the share capital of the company, you must check the class of shares in which the investment offering is made; do the shares have voting rights equal with the original shareholders, or profit participating only. And then comes the issue of at what price are the shares being offered? At par, or at a premium? If it’s the latter, is the premium justified?

When investing in bonds, you must choose the rate of return offered, and how that compares to other comparable investments in the same type of instruments? If you wish to have steady income, then you also need to check to see how often the interest is paid?

Whatever the decision, the real issue is that you are investing in the company and if the company is successful, then you are likely to receive higher dividends if you invested in the shares and steady interest, if you invested in the bonds. If the company is successful, then you are likely to receive your money back.

So make sure you understand the business in which you are investing. The question to ask, if what is the company going to do with the money that it raises from investors, shares or bonds, which brings us to closer examination of the business plan. Are the forecasts realistic?

It is important to understand both the company’s business model and the overall market prospects. What exactly is the company going to do and is there a market for this? Does the management have the track record to beat the competition?

You need to make sure such matters are dealt with in the business plan. Only after you understand the sector and product on offer and get more confident with the management team, then you can move forward.

Make sure you read and understand the Key Investor Information Document (KIID) or Key Investor Sheet (KIS) that every company seeking money must publish in which it must explain all the above parametres and so much more including explaining the risks of investment, exit strategy and safeguards.

At this point its good to make sure you follow the magic word of having a well diversified portfolio and never putting all your eggs in one basket.

If you invest exclusively in products from the same sector, you may incur losses in the event of sector-specific problems. On the other hand, those who diversify increase their chances that a weak performance in one sector will be offset by a better performance in another.