Running a profitable, fast-growing company is exciting. You have poured your heart into it and you are finally reaping the rewards of your hard work. To grow your business, gain a competitive advantage, and maximize profit, you need to start investing your capital strategically.
In this article, you will learn a few basic rules of investing.
Predict Investment Risks
The rules of investing are clear – the riskier the investment, the more profit it generates. However, as a young, growing company, you need to minimize investment risks and avoid making costly mistakes
Precisely because of that, you need to understand and predict the potential investment risks you may face. Some of them are:
- Market risk – adverse price movements may affect the value of your investment. Some of the most common types of market risk are changes in equity prices, interest rate changes, or foreign exchange fluctuations.
- Concentration risk – you lose money because your cash is concentrated in a single investment or industry. That is why you need to diversify your investments across different markets, locations, and investment types (more on that below).
- Horizon risk – your investment horizon is shortened due to an unforeseen event.
- Inflation risk – inflation reduces the purchasing power of the money. If your investments do not keep pace with inflation, your bottom line may suffer.
- Liquidity risk – the risk of not being able to sell your investment at a higher price or not being able to sell it at all when you want to exit the market.
Diversify your Investment Portfolio
Anyone knowing the basics of finance could tell you that diversifying your investment portfolio determines your growing business’ financial success for years to come. The wider your investment portfolio is, the more stable your return on investment will be. That way, you will reduce the risk of failure and ensure faster success.
Sure, the way you will diversify your investments depends on many factors, such as your tax status, your budget, the maturity of your company, and so forth.
For starters, to increase your return on investment, consider investing abroad. By buying international stocks, you will be able to grow overseas and improve your revenue stream. For example, when the U.S. stock market stagnates, your company will keep generating profits.
Many entrepreneurs benefit from switching to the cryptocurrency market, as well. To mine Bitcoin, for example, you would need to invest in a Bitcoin mining rig, a computer used for cryptocurrency mining, and connect it to the mining pool to start generating income.
Based on the blockchain, Bitcoin is decentralized, meaning you will not need to rely on your bank to process financial transactions. That makes it faster, cheaper, and more transparent, building trust with your customers.
Always Have a Solid Investment Strategy
There are many investment opportunities your startup will run into. As a startup, you cannot afford to jump from one trade to another, without planning your investment strategies and measuring their effectiveness. To invest wisely and grow your business, you should build an investment plan on clear goals and actionable data.
Now, there are different types of investment strategies:
- Value investing – look for underpriced stocks and purchase them. Then, you need to wait for their value to rise before you sell them.
- Income investing – buy fixed-income securities that provide a reliable stream of income and, yet, come with minimal risk. Those are, for example, bonds, exchange-traded funds, mutual funds, real estate investment trusts, and dividend stocks.
- Growth investing – that is a stock-buying tactic that focuses on companies that face the above-average growth rate, compared to their competitors. It includes investments in small companies that operate in promising industries and have high growth potential.
- Small-cap investing – this tactic involves buying stocks of businesses with a small market capitalization, between $250 million to $2 billion. Those businesses have high growth potential. As such, they can maximize your return on investment. Remember that companies like Amazon or Microsoft were once small caps. However, they are more volatile and harder to trade.
No matter what investment option you choose, you should first set short-term and long-term goals to guide you during the investment process. You should also set the right benchmarks and objectives to measure how effective your investment strategy is.
Over to You
For any growing business, liquidity and solvency are critical for their success. That is why you need to make investment decisions strategically.
For starters, choose a low-risk investment strategy that will not compromise your business’ financial health or growth.
Second, never jump from one investment opportunity to another. Always evaluate investment risks and ask yourself whether the investment is worth it.
Most importantly, do not put all your eggs in one basket. Instead, diversify your portfolio to diffuse the overall investment risk and ensure long-term success.
While those tactics represent only the basics of investing, they will provide you with a strong foundation to build and grow your business.
Is there anything you would like to add? We are listening!