Investors rely on brokers and firms for making good investment decisions. Most simply, good investments make money. But good or suitable investments depend on the investor and their needs.
Brokers and firms have the legal and professional duty to prevent unsuitable investments. In addition to making money for their clients, they should seek good investments that fit into an investor’s risk tolerance and investment plans and which provide financial security.
It is important to identify an investor’s goals, set an investment budget and identify assets that have the potential for growth. Investments should balance other parts of the investment portfolio and provide diversification to lower risk in case there is a downturn in the economy or in an economic sector.
What investors should look for before investing
Risk is part of investing. But investments are consistently analyzed and there are indicators that provide clues of a good investment:
- Ongoing growth in revenues and earnings.
- Competitive advantages.
- Debt that is manageable.
- Produces income.
- Priced fairly.
Investments that may have solid growth during economic expansion may not continue to grow during downturns. Good investments grow under different economic circumstances.
Promising companies are also distinct and have competitive advantages. Their products or services permit them to withstand competition and volatile markets.
It is also important to review a company’s debt before investing. A high level of debt may be a warning depending on the company and its financial model. Excessive debt may also hinder a company’s capacity to grow and indicate financial problems. A company’s debt-to-equity ratio reveals its financial structure.
Specific investments are also recommended if the goal is to provide steady and passive income. Real estate, for example, may provide steady monthly rental income. Stocks can produce income if the company pays dividends. Investing exclusively in growth stocks that do not pay dividends, however, may not fit into these goals.
Price is also important. Wide price swings and more than average trading are warnings.
Overpriced investment may be an indicator or price manipulation or investor exuberance. Overpaying for investments reduces potential returns and profits.
Underpriced investment, however, indicate that investors are selling that investment or that it is not being purchased. It may also show that the business is too new, or that it is close to failure.
Investors may have grounds for a lawsuit against brokers who made unsuitable investments. They should seek legal representation to pursue their rights.