Before you think about buying shares in a company, there are some key questions you should ask. It will help you make sure you’re considering all angles before taking the plunge and making an investment.
Read on to find out some of the most important questions to ask before investing in a business.
What questions should investors ask before buying shares in a company?
Chantelle Arneaud, strategic director at digital investment platform Envestors, has put together her top questions to ask before you start buying shares.
1. What’s the motivation behind the raise?
Are funds being raised through something like an initial public offering (IPO) to drive growth or to keep the business alive?
It’s always a good idea to learn how to read a company’s balance sheet and financials. This will help you understand whether the business has enough cash to survive or whether there might be rocky times ahead before you start buying shares.
2. Who owns the intellectual property?
This is something that we often don’t think about. Intellectual property (IP) gives us a good idea about whether a company owns an original concept or idea.
If they don’t, this could open the door for competitors to swoop in and steal some of the market share. Ideally, try buying shares in businesses that own their IP. Otherwise, the company could be held to ransom by whoever owns the key ideas.
3. Who are the key team members?
Vital to the success or failure of a business is who is running it. Even the best ship will sink if the crew is neglectful or ineffective.
Try to find out who makes up the core team of the company before you consider buying shares. Watch out for any conflicts of interest amongst directors. Ensure anyone wielding power at the company has the right skills and a strong track record of previous performance.
4. Is the company using professional support?
Before buying shares, take a look into whether the founders of the business are working with qualified professionals to assist with the complex process of fundraising.
If the company is trying to do everything on its own and bootstrapping its way through key tasks, this could be a red flag.
5. Are there any legal issues or disputes?
Legal issues have the potential to kill a business. Try to research whether or not the company has any outstanding disputes before buying shares.
This could be with a vendor, employee, customer or even HMRC. Not only can legal problems be costly, but something simple like outstanding invoices could mean cash flow issues.
6. Are you motivated by your head or your heart?
Investing and buying shares can be an emotional business. But it’s important to let your head rule your heart.
If you find an exciting opportunity, make sure you’re not justifying excessive valuations due to your excitement. This sounds easy in theory, but it’s harder to do in practice when you get swept up in the thrill of investing.
How do I start buying shares?
Once you’ve done your research and thoroughly considered an investment, the next step is to actually start buying shares.
Always keep in mind that no matter how much research you do, the value of investments can go down as well as up. So, create a solid plan, be sensible, and remember that when buying shares, you may get out less than you put in.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in the future. The content of this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
The post 6 questions investors should ask before buying shares in a company appeared first on The Motley Fool UK.
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