Golden Rules When Investing

 By Jason Fittler

You want to get ahead by investing shares.

But where do you start?

The first and most common approach is to look for some recommendations.

Oops! You already made your first mistake.

First Step is to Find a Broker

Brokers make their money by finding good companies to invest in and then passing on these ideas to their FEE paying clients.

Free advice is worth exactly what you paid for. Sure, if you go online, buy a paper or magazine you will find plenty of hot tips or so you think.

The facts are, brokers and fund manager do not write about their top buys. They will first build their own position before telling the public.

By the time you got the tip most of the upside is gone.

You Have a Broker

Should you just buy everything they recommend?  NO!

This is your money so you must make sure you are comfortable with the company you are buying.

Easy to Understand 

Make sure that you understand what the company you are looking to buy does. Can you identify what the company does to make money and the cost and risks associated with not just the company but also the industry it is in. 

Example: NAB is a bank, it lends out money to people and charges interest. It also charges fees for its products and services such as bank accounts, eftpos and credit cards. NAB also has a financial planning arm where it again charges fees for advice and access to products. 

If you cannot work out what a company sells or does to make money, it is best to avoid.

Capital Requirements

Some companies are highly capital intensive. Meaning that most of the profits get reinvested back into the company. 

This puts a strain on the company’s cash flow and dividends. Low capital-intensive companies usually have a stronger cash flow and lower risk level.

Barriers to Entry

The harder it is for a new competitor to gain access to the company's client base the stronger the company. Usually the higher the initial upfront cost the higher the barrier to entry, a good example are toll roads. The cost of someone else building another road beside it costs way more than the benefit they will receive.

Government Involvement

Any company, which relies heavily on the government for income or government legislation, is a higher risk company.

If the government is the main client then the company is at risk of change in policy.

Companies need a diverse client base.

If government legislation restricts the company it will decrease its competitiveness. It will also increase the risk of the company.

Management

Always take a quick look at the management of a company. The company website should give you the details.

You are looking to make sure that the management has the relevant experience in the area that the company works.

Are they focused on the company or their own pay cheques?

Like to know more? Give us a call (07) 4771 4577.