Business Investing: Signs of a Great Deal for Future Returns

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Even businesses with the most lofty mission statements might not always reach their goals. Two stellar (and confounding) examples of this are Atari and the DeLorean Motor Company (1). Still, investing in a business opportunity should never involve a roll of the proverbial financial dice. It takes a great deal of research to appreciate which ventures may turn a profit and those to avoid at all costs. Much of this is associated with the type of business, the industry and the product or service that it is offering. Let us therefore take a look at some of the hallmarks of a good investment opportunity.

Multiple Products

A sign of a potentially profitable firm can often be associated with the exposure that a certain business has within a specific industry. An enterprise that is associated with a single product or service always runs the risk of failing to appeal to their audience. This may eventually result in a good amount of money being lost if their performance sheets run into negative territory. On the contrary, those which spread their risk through diversification are much safer ventures. One example can be seen in the company Britvic (BVIC). Offering numerous soft drinks such as Robinson’s, Tango and R-Whites Lemonade, this company has been rated as one of the best small-cap stocks of 2016 (2).

Mandatory Services

Another sign of a business worth investing in is one which provides what can be considered “essential” goods or services. Common examples here include power companies and gas suppliers. The fact of the matter is that there will always be a market for such enterprises and the chances of a major firm losing massive amounts of capital are dramatically reduced when compared to the fickle growth of a small-cap venture. One notable example of this trend can be seen in the 2016 performance of National Grid (NG). It has been shown that earnings rose more than 22 per cent during 2016 (3). While this growth may be viewed from more of a medium-term perspective, businesses that specialise in such sectors are relative safe havens.

The Target Demographic

It’s always important to determine the demographic that the business intends to target, and how they will accomplish this. Not only is this critical from a simple marketing point of view, but we need to recognise that certain segments of the population comprise a higher aggregate portion of the total buying power. This is particularly the case when we view millennials as the target. These individuals are keen on new opportunities and they are also associated with higher amounts of liquidity when compared to the baby boomer generation or pensioners.

Transparent Balance Sheets

Although this goes without saying, there have been countless would-be investors who have lost a great deal of money due to the fact that they did not carefully examine the balance sheets of a specific business before committing to a position. This can sometimes be difficult if a company has not yet floated, as it will not be subject to the transparency rules associated with a listed firm. Still, an enterprise which is open in regards to their present and predicted finances tends to be much more trustworthy than one that embraces a tight-lipped stance.

Market Capitalisation

The market cap of a company is the final piece of the investing puzzle. Many investors are attracted to firms with relatively low market caps. Although this may indicate less costly entry-level positions, the fact of the matter is that fluctuations in the share price are much more likely to occur. Of course, each individual will have his or her own “comfort level” in terms of market capitalisation. There is nonetheless no doubt that higher market caps are always a signal of greater stability during turbulent market conditions. These figures also illustrate that other investors are confident in regards to the product or service being offered.

It is always wise to combine these strategies with the required tools from a reputable and established company.  One example of such is CMC Markets, who on top of having 25 years experience are regulated by the Financial Conduct Authority, meaning that they must adhere to strict regulatory requirements – something to ensure you look for. With the appropriate amount of insight and after performing a good deal of research, the chances of uncovering a financial “gem” within the markets will dramatically increase.

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