How to find sound investment opportunities
Most people don't have good parameters to make investment decisions, and they suffer because of this. If you don't know how to evaluate different investments, you will probably for the one that is easier, and usually the one that performs worse.
In this world in which financial decisions can be very complicated, you need to follow some guidelines to select the best investments. These parameters will help you to make sound financial decisions without overstretching your budget.
Even though it is hard to decide on what are the best options in financial terms, one may develop a set of rules that can make this process a little easier. While we cannot know for sure what will happen in the future, using sound financial practices can make our lives much better, by helping us in difficult economic times.
Risk of an investment
The first thing you need to keep in mind when investing is the type of risks you will be incurring. Each investment type has not only one, but several types of risks that you need to overcome.
The simplest type of risk is that of losing your investment. For example, investing in companies stock brings the risk of losing part of you money or even your whole investment. If the company performs badly, your shares will lose values. If the company files for bankrupcy, then the shares become worthless and you lost your complete investment.
To avoid this kind of situation, your need to determine the overall risk of your investment. What is the probability that it will lose money? Even if you cannot answer this with certainty, you need to determine the risks of your investment before you commit to it.
Reducing your risk
A form of reducing your risk is to have always a target of how much you can loose. Most money manager have the following motto: if you take care of the loses, the profits will take care of itself. What this means is that whenever you enter a new investment, you need to make sure how much you can lose before you cut your loses and run from that investment.
When you have a sound plan to take care of the losses, whenever the profits appear they will guarantee your profitability.
Another reason people don't make money is that they are more worried about avoiding losses than making profit. On the contrary, you should always take a small loss if that means that you are not risking too much of you money. If you do this consistently, whenever there is profit it will be much more than your losses.
Most people also take profits too early. If you have some investment that is making you money, keep with it as long as it generates more money. The moment the investment turns sour, cut it and go to the next opportunity.
Selecting good investment opportunities
Once you have a plan to cut losses and allow your profits to grow, you need a good investment. You have a large number of choices, such as stocks, real estate, futures, private equity in companies, among others.
Each investment has positive and negative factors. For example, real estate is a good investment because gives you tax advantages and allows you to use other people money. One advantage of real estate is that it can be hard to sell, and usually you have to give a good part of your profit (around 5% of the price of the property) to brokers.
Stocks, on the other hand, are very liquid assets. You can sell them almost imediatly, and the percentage that goes to brokers is not so high in each transaction. A disadvantage of stocks is that they are more volatile, so the variations in price can be much higher than normal.
In conclusion, every investment has its unique advantages and disadvantages. It has also its particular risk. A good investor needs to know what are these characteristics in order to make sound financial decisions.
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