One of the most important ways that we attempt to secure our finances, whether as individuals or business owners, is with proper investments. Knowing what makes for good investment then is crucial to everyone, in terms of financial decisions. Let’s consider what a good investment looks like.
What is an investment?
Broadly speaking, investment refers to something that will ideally generate income, profit or will appreciate in the future. As Investopedia highlights: “In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will be sold at a higher price for a profit.”
Examples of investments that most people know and use are stocks, businesses and real estate. Each of these can be invested in, ideally leading to an increase in an investment’s value – which means, should we wish to cash out or sell, we will have more at the end of the day.
Naturally, this means there will be better and worse qualities defining what constitutes good investments.
What makes for a good investment
The first thing to consider is what the total value is of the company versus the stock. This means knowing market capitalisation. The Economic Times defines it as: “The aggregate valuation of the company based on its current share price and the total number of outstanding stocks.” We should speak to financial experts so that we aren’t overpaying for a company’s stocks. Bad investments are often a result of paying too much for stock, for companies that are in fact worth less in terms of market capitalisation calculations.
Second, we should know about a company’s overall growth and per stock growth. As one investment expert noted:
“Most investors focus on a company’s share price. They should spend more time looking at a related question – how many shares the company has, and whether that number is growing or shrinking.”
This has an enormous impact in terms of the financial decisions we make, since it could mean we get swindled easier.
Third, we must remove emotions from business investment. No matter how much we might love a business, relate to its staff and so on, these shouldn’t be sufficient reasons for our investment. While feelings and emotions can drive a business toward profits, that’s no guarantee.
All of this is incredibly important when considering what constitutes best investments in South Africa and around the world.