How To Assess A Potential Investment

Everyone knows that investing in anything is a risk. It is not just money that you are putting on the line when you decide to back a project. You are also spending your time and investing your attention. If it does not work, you will be financially disenfranchised as well as having nothing to show for your dedication. That is why when you are assessing the viability of a potential investment, you have to think carefully. The first and perhaps most important factor to think about is who you are investing with. If they try to rush you into making a decision, or you do not know them, you should be exceptionally skeptical and careful. The sad reality is that lots of people will try to con you out of your money. Unfortunately, it works quite a lot of the time. The recent Bernie Madoff Ponzi scheme case demonstrates this point. A lot of people trusted him, perhaps because the scale and grandeur of his operation suggested that it was legitimate. It seemed too good to be true and yet many people, including celebrities like Kevin Bacon, Steven Spielberg, and Larry King believed in it. He managed to scam about $20 billion from his investors, most of which those people will not get back. Being smart and ruthlessly inquisitive is, therefore, a great way to move forward when making investments. 

However, there are many different types of scams of which you need to be aware so that you do not lose out. Apart from a Ponzi scheme which relies on the appearance of legitimacy, there are manipulations of the stock market that can see you lose money too. A so-called ‘pump and dump’ scheme is illegal and involves a small group of investors who invest in a company before suggesting it to lots of other people. This leads to a spike, at which point the original investors sell at a massive profit before the stock price falls again and the thousands of others are left with a bad investment. There is another similar practice that works in reverse. Investors will put their money in a company and then spread disinformation about it so that they can short the stock. Not only is this sort of behavior a rather obvious exposition of the avaricious self-interest of some people, it also demonstrates a complete disregard for the people who are working hard every day to actually make their companies successful. To be toyed with like that so that a few dishonest people can make some money is probably exceptionally frustrating. 

This is not to say that every investment is an illegitimate attempt to steal your money though. There are lots of great opportunities which will allow you to make money. For example, if you think about investing in buy to let student accommodation, for instance, you should carefully consider exactly where the property is and the health of the local university. If the school is intending to raise its tuition fees in the near future and this will change the demographic of students that are able to study there, it may affect what sort of tenants you will have as an investor in student properties. However, student accommodation is a pretty good investment when you consider that more young people are going to college now than ever before. It is therefore clear that there will be continued demand for student housing and that your investment will likely produce a good return because it will not be difficult to find tenants. As startling as the student debt crisis really is, the fact remains that a lot of young people will have enough money, whether from a loan or other source, to pay for housing. It is not something that they can not do without, after all. 

If you invest in stocks rather than something more concrete like real estate, there are particular things that you should know. Insider trading is obviously an offense for which you can be sent to prison. However, the exact legality of what information is legitimate and which is forbidden can be rather confusing at times. The Securities and Exchange Commission (SEC) is the body that is responsible for keeping the financial markets fair, and they will prosecute anyone who they think is guilty of supplying or acting on information illegally. The way in which they make this determination is by applying the Dirks test which was a response to the 1984 Dirks vs. SEC Supreme Court case. If the person in question violated their company’s trust and did so knowingly, they will have betrayed their fiduciary duty and will be considered guilty of insider trading. Being aware of these differences is important.