How to Become a More Savvy Business Investor

You can become a more savvy business investor by understanding tools that lenders and investors use for getting information value from a business’s financial reports. An investment opportunity in a private business may not present itself often. However, if you make it known that you have money to invest as an equity shareholder, you’d be surprised at how many offers come your way.

Alternatively, you can invest in publicly traded securities, those stocks and bonds listed every day in The Wall Street Journal. As an example, your stockbroker would be delighted to execute a buy order for 100 shares of, say, Caterpillar for you.

Remember that your money does not go to the company (Caterpillar, in this example). Your money goes to the seller of the 100 shares and you are investing in the secondary capital market — the trading in stocks by buyers and sellers after the shares were originally issued some time ago. (If you invest in the primary capital market, then your money does go directly to the business.)

You may choose not to manage your securities investments yourself. Instead, you can put your money in one or more of the thousands of mutual funds available today, or in an exchange-traded fund. You’ll have to read books or other publications to gain an understanding of the choices you have for investing your money and managing your investments.

Investors in a private business have just one main source of financial information about the business they’ve put their hard-earned money in: its financial reports. Of course, investors should carefully read these reports, looking for the vital signs of progress and problems. The financial statement ratios point the way — like signposts on the financial information highway.

Investors in securities of public businesses have many sources of information at their disposal:

  • They can read the financial reports of the businesses they have invested in and those they are thinking of investing in.

  • Instead of thoroughly reading financial reports, they may rely on stockbrokers, the financial press, and other sources of information. Many individual investors turn to their stockbrokers for investment advice.

  • Brokerage firms put out all sorts of analyses and publications, and they participate in the placement of new stock and bond securities issued by public businesses. A broker will be glad to provide you information from companies’ latest financial reports.

The more you know about interpreting a financial report, the better prepared you are to evaluate the commentary and advice of stock analysts and other investment experts. If you can at least nod intelligently while your stockbroker talks about a business’s P/E and EPS ratios, you’ll look like a savvy investor — and you may get more favorable treatment. You might consider watching financial news on television or listening to one of today’s popular radio financial talk shows.

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