Investing 101: the Pre-Work

Sarang Ahuja’s latest post:


Whether you are investing in a friend’s startup or in a fortune 500 company, it is absolutely imperative that you do your due diligence and learn more about the organization that you are investing in. When making that commitment, you need to understand that it is not an easy decision. Buying any type of equity from a company is not just a simple piece of paper. Rather you are being part owner. For these reasons, it is important that you spend the time researching and evaluating the company’s background, financial history, and future goals before making your decision to invest.

Below, I have outlined a strong attack plan to help direct you into making a well-informed and well-adequate decision. This plan will highlight various points when researching your company. At the end of the day, you want to make sure you are making the right decision. Just evaluating a company’s current and present status is not enough to foresee its financial future. To truly understand what business you are getting into, dive in from the beginning and read about how the company came to be, where it has gone, and what it wants to achieve. Remember, while there is no such thing as a sure thing, there is always a way for you to improve the odds.


Research the Chief Executive Officer

The Chief Executive Officer (CEO) is the most senior corporate administrator or executive in charge of managing the overall organization. When starting your research, begin here by understanding what type of leader is running this business. We have seen countless times how damaging a CEO can be to a business from the likes of Yahoo and Twitter. Make sure there is a strong and trustable leader behind the company. To evaluate this, ask yourself a series of questions:

  • What is the CEO’s professional and academic background?
  • What is the CEO’s vision for the company?
  • Do you share the same vision and goals for the CEO?

If you are finding conflicting issues with any of these questions, do not invest. If however, you are seeing certain similarities, dive in deeper and extract their overall financial plan for the next five (ten, twenty) years.

Evaluate the Company’s Financial Health: Net Income, Revenue, and Cost

Having a strong holistic view of the company’s finances is incredibly important for any investor. Even though a company is currently successful, you want to make sure you understand the ups-and-downs of their business and how they were able to any financial hurdles in the past. By evaluating those situations and numbers, you will be able to gain a sense of security of the overall company. In addition, make sure you review and assess the company’s financial health. To do this, evaluate and understand the Net Income, Revenue, and Cost figures. Revenue, by definition, is simply the raw amount of money the company made from salves of its products or services. If there are any gaps in the revenue, try asking what could have caused those changes. Afterwards, look into their cost. Cost is the value of money that has been used to produce the company’s products or services. This can range from obligatory expenses like employee salaries or rent to miscellaneous expenses such as snacks or office supplies. Make sure that the company is wise with their money and they are not spending their money on frivolous items. Last but not least, gauge the overall profit and profit margins the company makes quarterly and annually. See where they are going to go with this and what they will potentially do with those numbers to grow and scale for the future.


Analyze the Company’s Business Model

Similar to the CEO section, you want to gain and overall understanding of the company’s business model. A business model (business plan) breaks down the background, history, vision, goals, finances, and future plans of a company. Start off by asking yourself those hard-hitting questions of whether or not you are interested with the company. Go even as far and question if you agree with its vision and beliefs. Remember, like we said above, when you are investing, you are not simply getting a piece of paper. Instead you are becoming part owner. Make sure the company fits your own personal and professional interest. This will allow you to become more engaged with its news if you share more of a common interest.

from Sarang Ahuja | Finance


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