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You get a text from your best college buddy saying to call him ASAP. On the phone, he can barely contain his excitement. His brother-in-law works at a popular high-tech company that's about to announce a revolutionary new product. Your friend is an active day trader — someone who buys and sells stocks online — and guarantees that the company's stock will soar on the news. If you invest $1,000 today, your shares will be worth twice that amount by the end of the week. He's going all in. What do you say?
With financial investments, there is no reward without risk. The riskiest bets, like short-term investments in a volatile stock market, can bring the greatest rewards, but also stunning losses. The truth is that your friend's "sure thing" is anything but, and investors need to understand how different risk factors can impact their financial future.
Even the most conservative investment, such as an FDIC-insured certificate of deposit (CD), carries a degree of risk. If the interest rate on the CD is too low, your investment might be outpaced by inflation [source: Financial Industry Regulatory Authority].
Smart investors try to manage risk by investing in a diverse portfolio of stocks, bonds, CDs and other financial instruments, often through a professionally managed mutual fund. But other investors prefer a more hands-on approach, buying and selling stock in individual companies, either through a broker or an online trading Web site. If you're thinking about investing in a particular company rather than a diversified mutual fund, you need to go with more than your gut instincts. You need to analyze the specific risk factors that come with every investment and every company.
Start by researching some basic questions: What do Wall Street analysts expect from the company's next earnings report? How does the company's historic stock price compare with market indexes like the Dow Jones Industrial Average? Has the company weathered the recession well? Is any member of the top management team under investigation? Are any of its exec selling off lots of their holdings?
Let's start with a look at the big-picture performance of an entire industry or sector.
When evaluating the risk of investing in a particular company, start with the big picture. Every company is unique, but individual success also depends on trends within the business sector as a whole. Let's say you're thinking about investing in an auto company. You might notice newspaper articles reporting a decreased demand for large, heavy trucks, but an increased demand for fuel-efficient vehicles. To lessen your risk, you would want to invest in a car company that designs lightweight or hybrid vehicles.
A business sector can be as broad or specific as you want. You can look for data and analysis of the entire consumer electronics sector or you can home in on mobile computing devices like notebooks, netbooks and tablets. Most business sectors are covered by "trade" publications and Web sites — check out the Yahoo! trade magazine directory — that go into great detail about industry sales figures and trends.
Major newspapers like The Wall Street Journal, The New York Times and the Financial Times also publish in-depth coverage of business trends and industry performance. And don't forget social media. Stock analysts and "experts" of varying qualifications have flocked to sites like Twitter, Facebook and Google+ to share the latest financial reports and industry news [source: Koning Beals].
When evaluating the performance of an entire business sector, pay attention to whether the sector is dominated by one or two major players, or if the market share is spread out more evenly. Now let's talk more about evaluating the competition.
Photo Credit: howstuffworks,inc
You get a text from your best college buddy saying to call him ASAP. On the phone, he can barely contain his excitement. His brother-in-law works at a popular high-tech company that's about to announce a revolutionary new product. Your friend is an active day trader — someone who buys and sells stocks online — and guarantees that the company's stock will soar on the news. If you invest $1,000 today, your shares will be worth twice that amount by the end of the week. He's going all in. What do you say?
With financial investments, there is no reward without risk. The riskiest bets, like short-term investments in a volatile stock market, can bring the greatest rewards, but also stunning losses. The truth is that your friend's "sure thing" is anything but, and investors need to understand how different risk factors can impact their financial future.
Even the most conservative investment, such as an FDIC-insured certificate of deposit (CD), carries a degree of risk. If the interest rate on the CD is too low, your investment might be outpaced by inflation [source: Financial Industry Regulatory Authority].
Smart investors try to manage risk by investing in a diverse portfolio of stocks, bonds, CDs and other financial instruments, often through a professionally managed mutual fund. But other investors prefer a more hands-on approach, buying and selling stock in individual companies, either through a broker or an online trading Web site. If you're thinking about investing in a particular company rather than a diversified mutual fund, you need to go with more than your gut instincts. You need to analyze the specific risk factors that come with every investment and every company.
Start by researching some basic questions: What do Wall Street analysts expect from the company's next earnings report? How does the company's historic stock price compare with market indexes like the Dow Jones Industrial Average? Has the company weathered the recession well? Is any member of the top management team under investigation? Are any of its exec selling off lots of their holdings?
Let's start with a look at the big-picture performance of an entire industry or sector.
When evaluating the risk of investing in a particular company, start with the big picture. Every company is unique, but individual success also depends on trends within the business sector as a whole. Let's say you're thinking about investing in an auto company. You might notice newspaper articles reporting a decreased demand for large, heavy trucks, but an increased demand for fuel-efficient vehicles. To lessen your risk, you would want to invest in a car company that designs lightweight or hybrid vehicles.
A business sector can be as broad or specific as you want. You can look for data and analysis of the entire consumer electronics sector or you can home in on mobile computing devices like notebooks, netbooks and tablets. Most business sectors are covered by "trade" publications and Web sites — check out the Yahoo! trade magazine directory — that go into great detail about industry sales figures and trends.
Major newspapers like The Wall Street Journal, The New York Times and the Financial Times also publish in-depth coverage of business trends and industry performance. And don't forget social media. Stock analysts and "experts" of varying qualifications have flocked to sites like Twitter, Facebook and Google+ to share the latest financial reports and industry news [source: Koning Beals].
When evaluating the performance of an entire business sector, pay attention to whether the sector is dominated by one or two major players, or if the market share is spread out more evenly. Now let's talk more about evaluating the competition.
Photo Credit: howstuffworks,inc
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