Should The Common Man Realistically Invest In Companies?

It requires a high degree of financial and industry knowledge to successfully invest in companies directly. You will need financial knowledge to effectively read the companies financial statements and projections. You will also need industry knowledge to recognize whether the business plan you are viewing has a good chance of success in its given industry. The following criteria will give you an idea of what you need to know in order to make a discerning investment.

Financial Knowledge

You should be comfortable with the following concepts in order to understand the financials of a potential direct investment into a company:

  • Read and analyze financial statements to determine the current solvency of the individual or group.
  • Read and determine the feasibility financial projections based on the fair market value of the good or service to be offered.
  • Determine the feasibility of a budget based on standard market costs of bringing the good or service to market.
  • Read and understand a business pro forma which models the anticipated results of your financial contribution.
  • Ask relevant and analytical questions regarding potential barriers to success of the business.

Industry Knowledge

You will need to know enough about the industry you are investing in to properly grasp the following concepts:

  • Recognize the market need for the type of company you are considering.
  • Know potential competitors and the success or failure of their business plans. If possible, know why they succeeded or failed.
  • Understand the unique value proposition of the company, i.e. what makes this different from competitors.
  • Recognize potential barriers to success of the business.
  • Determine the potential effectiveness of how the business plans to overcome barriers to success.
  • Determine any liability you may incur as a financial contributor to a business in this field including legality of the business, structure of the contribution and protections from exposure if you will be listed as an owner or on the board of the company.

Consider an Mutual Fund or Private Equity Firm

If you are not comfortable with the above criteria, direct investment in a company is not for you. Whether the company is a new venture of an existing business looking for capital, if you do not have this knowledge, it is not advisable to become and investor in that company. If you still would like to invest in companies but do not have the knowledge necessary, you may seek an advisor to assist you in deciding which investment to pursue. This type of investing is not direct; typically, you will go through a mutual fund or private equity group that acts as your broker. With a mutual fund or private equity group, the group will make decisions on which companies to invest in.

Consider a Brokerage House

When electing to go through a traditional brokerage, stipulate the types of investments you are interested in. State you are not looking for traditional stock and bond investing. Rather, you are interested in providing capital to directly invest in businesses. Your advisors should contact you only with these opportunities. They will also give you their best assessment of the risk factor involved in the company investment. Ultimately, it will still be your decision where to place your funds.

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