Investing 101: Before you start

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Investing 101: Before you start

Whether you’ve dabbled in investing before or are brand new to the subject, this 10-article series will give you a grasp on the basics of choosing and analysing investment opportunities. But in addition to reading through this guide from start to finish, there are a few other things we recommend you do.

Spend plenty of time on Google, YouTube, and trading app practice areas. There are hundreds of YouTube channels for every investing channel and asset class imaginable. Look for reputable sources who have proven track records, and who can speak in a language that’s understandable to your experience level.

You don’t have to read piles of investing books to get started. But read one or two. The importance of having a grasp on the philosophy of investing as well as the practicalities are underestimated by many newcomers who want to go in all guns blazing.

Investing philosophy doesn’t just help you to understand the difference between strategy and speculation. It will also give you a grounding in keeping emotion, bias, superstition, and FOMO in check. Many new investors learn the hard way that buying stocks ‘on a hunch’ is a good way to blow your funds. And not just when it goes wrong. A hunch going right is a dangerous way to boost your bravado.

Establish your risk tolerance. Or, as the Navy SEALs say, ‘get comfortable being uncomfortable’. The first time you lose money - even a small amount - will be a blow to your ego. But as much as loss should be mitigated, it can’t be fully avoided. The more you invest, the more you can make. This means you’ll need to develop a level of comfortability with risk. Think carefully about your own risk tolerance on a spectrum of low to high. If you’re a beginner, we recommend staying close to the former.

A successful investor bases their decisions on current rather than future data. This is for the very obvious reason that, for all the predictions in the world, future data doesn’t exist yet. They also understand that past performance is not a guarantee of future success.

So what exactly is the data that will dictate our investment choices? This article will cover the 10 key bases of ‘due diligence’ - essentially, structured homework you’ll need to complete on all potential opportunities before you dive in.  

To sum up each chapter:

The problem

What problem is the product or service solving? Is anyone else already solving it? If so, why is this solution better than others? These three questions give you an excellent and uncomplicated grounding for assessing the potential of a company.

Let’s say the solution already exists and is being provided well by several other brands. The company you’re considering may be able to challenge those competitors, but the potential for returns is unlikely to be explosive. If the company is a market disruptor and is solving a problem for the first time, or in a very unique way, they might be a better candidate.

The solution

The most successful startups are often the ones who have found a new way to solve an old problem. They’ve managed to break away from the status quo and the ‘this is how it’s always been done’ mentality.

In this instalment, we’ll be looking at the company’s solution to the identified problem: is it unique? Is it sustainable? Is it scalable?

The market

Now you’ve assessed the product offered, it’s time to reflect on the market. The first question in this section will be: are there enough people needing this solution?  

An invention or innovation might be technically or scientifically impressive, but if it’s not useful to enough people, the company will have limited potential for growth.  

The question of mass appeal may not apply in the case of premium, luxury, or exclusive products or services. Some products are designed for very small niches or specific demographics. In this case, you’ll need to ask if the price point is high enough to align with the lower demand.

The competition

In this section, we’ll analyse the companies already offering similar solutions to the company you’re considering investing in. This stage will look at how long they’ve been in the market, how they’re solving their customers’ problems, and if there are any opportunities they’re missing.

The leadership team

The primary driving force behind a company isn’t the idea. It’s not the funding. It’s the people. When you invest in a company, although market conditions will play a role, the chances of you seeing a worthwhile ROI rest in the hands of the individuals making the decisions.

Every company will experience setbacks and challenges, but a team that works well together has a better chance of weathering them.

In this section, we’re looking at the people behind the project. Who inspires confidence? Who commands your trust? And who will ultimately deliver a worthwhile return on your investment?

Market traction

Traction acts as proof of market demand. An investment opportunity shows promise if it already has traction - which can be demonstrated by various factors including strong sales and rising engagement.

Traction refers to evidence of positive market response. It shows investors that there’s an established market of people willing to pay for a solution to their problems. Knowing how to measure traction is key to ensuring good ROI.

Use of funds

Once you have a good idea of a leadership team’s competence, you’ll need to look at their plans for your investment funds. How are they going to use your funds to generate returns?

A team should present a clear picture of their long and short term goals. Funds for expansion should be appropriately balanced across marketing, advertising, R&D, upgrading equipment and logistics, and staffing.

Exit strategy

If you’re investing in an existing or established company, you’ll be looking for growth and dividends for long-term, reliable returns. Startup investing usually aims for a big windfall when the startup is sold or acquired.  

When investing in either company type, you’ll need to know and understand the company’s exit strategy. Are they planning on selling the whole business? Are they gearing up for a merger or acquisition? An initial public offering (IPO)?Will they retain partial control? These factors and their planned timeline will dictate how soon you’ll see returns.

Risk

Any investment comes with a degree of risk. Blue-chip investment is seen as less volatile. Investing in early-stage startups, on the other hand, is a case of high-risk, high-reward.

The potential and probability of success in investing is a field of study on its own. It is the reason it’s crucial to have a grounding in investing philosophy and psychology as well as practical how-to knowledge. In this instalment, we’ll explore key terms relating to risk; helping you to develop an understanding of how to mitigate losses.

Types of deal

Investing in companies doesn’t just come in the form of stocks and shares. There are many different types of ‘deal’, and the financial jargon surrounding them can be confusing. In the final instalment of our Investing 101 series, we’re going to break down what each one means in plain English.  

When we speak about a ‘deal’, we’re essentially talking about an agreement entered into by two or more parties for their mutual benefit.

One of the most common types of deals is an equity stake (that is stocks and shares). But there are other widely used deal types such as convertible notes, funds, and bonds.

Ready to get started? Click here to read the first article in our Investing 101 series.

James Brannan

Director of Operations at STAX

Understand the Risks

Under crowdfunding legislation in Australia, STAX is what’s known as a ‘gate keeper’. That means we’re obliged to check certain company details on your behalf. Read more about how we select companies here.

Like anything in life though, investing on STAX comes with risks. While we carefully screen every company, we can’t actually guarantee their success. Nor do we give any investment advice or take responsibility for losses. We’ve covered the general risks here.

All views, investment or financial opinions expressed are those of the author and do not necessarily reflect the official policy or position of STAX. The information contained in this post is not investment advice or a recommendation to buy or sell any specific security.

Information is currency.
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