Is it beneficial to make investments in an already popular and successful business?
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yorkiesteve
1 year ago
Expert Financial Adviser Answer
Darren Smith
answered 1 year ago
yes it can be but you have to consider why are you investing.
if it is in response to recent media coverage of an investment, the chances are that the profit in the short term has already been made and you are ready a report on yesterdays news.
with any investment you need to consider how long are you prepared to invest, what degree of risk are you willing to accept, what contingency do you have in place for emergencies (always good to keep some cash in the bank for a backup), are there other more pressing reasons to use the money for something else ie paying down a debt with a very high rate of interest?
i dont know if this has answered your question as it was a little vague but if you are willing to expand on the situation it will be simpler to give you a more relevant answer
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if it is in response to recent media coverage of an investment, the chances are that the profit in the short term has already been made and you are ready a report on yesterdays news.
with any investment you need to consider how long are you prepared to invest, what degree of risk are you willing to accept, what contingency do you have in place for emergencies (always good to keep some cash in the bank for a backup), are there other more pressing reasons to use the money for something else ie paying down a debt with a very high rate of interest?
i dont know if this has answered your question as it was a little vague but if you are willing to expand on the situation it will be simpler to give you a more relevant answer
Expert Financial Adviser Answer
Dr David Carter FPFS
answered 1 year ago
It will be beneficial if the business is successful - hugely beneficial, perhaps. It will be disastrous if the business fails, and you could lose the lot.
Investment in a single business, however promising or well established that business has been, must be considered a high risk activity. As Darren has said, you are relying on yesterday's news or, as I would put it, you are investing in the last best thing, and there is actually something to be said for the phrase which is often trotted out without thought: 'past performance is not a guarantee of future performance.'
This is why collective investments such as unit trusts and oeics exist - investing in such funds means that you participate in the performance of not just one, but of perhaps 50 or 100 different companies, under the guidance of a manager who, with his team, will be monitoring their performance and the economic climate, and will be making suitable adjustments. This diversification dramatically reduces risk (of course it by no means gets rid of it altogether) but means that you are not subject to the fortunes of just one company.
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Investment in a single business, however promising or well established that business has been, must be considered a high risk activity. As Darren has said, you are relying on yesterday's news or, as I would put it, you are investing in the last best thing, and there is actually something to be said for the phrase which is often trotted out without thought: 'past performance is not a guarantee of future performance.'
This is why collective investments such as unit trusts and oeics exist - investing in such funds means that you participate in the performance of not just one, but of perhaps 50 or 100 different companies, under the guidance of a manager who, with his team, will be monitoring their performance and the economic climate, and will be making suitable adjustments. This diversification dramatically reduces risk (of course it by no means gets rid of it altogether) but means that you are not subject to the fortunes of just one company.
Expert Financial Adviser Answer
John Stirling
answered 1 year ago
If investing into any investment there are two elements to your return - as a gross simplification - there is the specific return which relies on the performance of the business itself, and is generally driven in the short term more by actual compared to expected performance rather than any absolute metric, and over the longer term by the relative performance of the business compared to it's peers, and then secondly there is the return from 'the market' - which is the generic return you'd expect from being invested in that type of investment.
The question in this case is whether the 'already popular and successful' business is better or worse than people think. i.e. are you a better judge than 'the market' of it's prospects.
If there is a reason that it's price is not efficiently calculated by the market then it may be a good investment. Of course it could be dreadful too, my worst ever investment choice related to a popular and successful business which was moving up from AIM (the Alternative Investment Market - home to many smaller companies in the UK) to the FTSE main market (the main stockmarket in London for the largest companies) - always had growing profits, high profile, biggest company on AIM. During the stock take prior to promotion it transpired some stock was missing, bank covenants were breached, and the company evaporated over night.
100% loss.
So popular and successful is no guarantee, but it is a guide that if it all goes horribly wrong you won't be alone
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The question in this case is whether the 'already popular and successful' business is better or worse than people think. i.e. are you a better judge than 'the market' of it's prospects.
If there is a reason that it's price is not efficiently calculated by the market then it may be a good investment. Of course it could be dreadful too, my worst ever investment choice related to a popular and successful business which was moving up from AIM (the Alternative Investment Market - home to many smaller companies in the UK) to the FTSE main market (the main stockmarket in London for the largest companies) - always had growing profits, high profile, biggest company on AIM. During the stock take prior to promotion it transpired some stock was missing, bank covenants were breached, and the company evaporated over night.
100% loss.
So popular and successful is no guarantee, but it is a guide that if it all goes horribly wrong you won't be alone
Expert Financial Adviser Answer
Paul Ross DipPFS CII(MP&ER)
answered 1 year ago
This is something you have to tread very carefully with. As David mentioned, this is high risk and should be viewed not only as "what's in it for you", but more to the point, "what's in it for them?" Depending on your tax status, there could be tax implications on selling your share in the long term, which have become less favourable in the past few years, due to legislation changes
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