Four Basic Rules of Investment

Investment is essentially a system of gaining profit by putting your money into something that’s potentially lucrative. In other words, you buy something, so you may sell it at higher value later. You can do investment in various fields, like business management and finance. Investment is critical to achieve goals in your lives, such as comfortable retirement period. Investment will always come with a degree of risk. If the risk is higher, the potential of profit is also higher. So, if you want to have higher profit, you should deal with higher risk as well. A smart investor always seeks to balance profit and risk. If you are too cautious, your profit will be minimal and the growth of your portfolio will be too slow.

However, if you take risk recklessly and aim for the fastest growth, you may end up losing money unnecessarily. If you are not being careful, there’s always a possibility that you get involved into some kind of bad investment and you will come up as a loser. One good way is to spread out your investment properly in various ventures. It’s a common rule that you spread eggs in multiple baskets. Here are other basic investment rules that you should implement:

  1. Make sure that company is large enough: It can be an investment company or a company with stocks that you can purchase. Big companies that operate for decades in the market with good stability and profitability are great platforms for your investments. You can check their historical records, whether that can handle fluctuations. If they could handle a severe recession without much difficulty in the past, you can be sure that they will have good growth in normal times.
  2. Check the financial condition: If you are planning to invest on a company, you should check their financial condition. Their long- and short term financial obligations should be less than their assets and potential profitability. This is a basic concept to know whether the company is threatened by the risk of default or bankruptcy when the market condition is getting worse.
  3. Check the level of revenue: If the company has operated for a few decades or more, you should be able to check their graph of revenue. It will be very favourable if in the past ten years the company hasn’t reported a loss, regardless of the market conditions. Growth may be slower at specific years, but it is still sustained. Researching about your company that you want to invest in is very important. Their past record should be reliable indicator whether growth can be sustained or it will dwindle out soon, due to some internal factors that are not resolved immediately.
  4. Check the cost to earnings ratio: The platform that you should choose should have at least moderate cost to earnings ratio. In the past three years, earning that investors get from stocks should be consistently positive. You should make sure that stocks are matching the requirements.
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