Investing money in someone else’s business can be a great business opportunity. However, you must take certain precautions and considerations. If you are thinking about investing in companies and becoming a shareholder, you came to the right place, because we will tell you the 7 tips that will help you know if it is the right company for you, your money and your time, Join us!
What does it mean to become a shareholder of a company?
To begin with, we will explain what it is to be a shareholder: it means to own part of a company by means of the shares it issues, which means that, if a group of shareholders founds a company, the ownership of the company will be divided among them.
This type of process can be done in several ways, but the most popular is the one that involves the shares being distributed privately and the public offering of the shares.
When we talk about the private distribution of shares, we mean that it occurs between parties interested in founding or buying a company and exchanging capital for shares.
The second alternative, going public, aims to raise capital from the markets and, in exchange, offers its share capital. This group of shares, on which we will focus, comes to the market when a company decides to go public, which means that it wants to offer a part of its ownership in exchange for cash.
Behind this lies what we might call the paradox of growth, for a company that is in the process of expanding its horizons and seeking to grow more, justly needs more capital to enable it to achieve its goals. So, in order for the company to increase its capital raising, it will have to list its shares on the stock exchange and open them for public sale.
In conclusion, being a shareholder means that you can be part of a company, owning a small fraction of it. This implies that you have a series of rights to which, on special occasions, you have access.
What are the rights of a shareholder?
As we have already mentioned, as a shareholder you will have access to a series of rights that will depend on the type of shares you own, as they can be common or preferred.
Preferred shares are offered privately and are usually purchased by corporations or institutional investors, since they usually grant seats on boards of directors and are purchased in large quantities. Whereas, common shares can be purchased on the stock exchange and through brokers.
Here are the 6 rights you gain when you become a shareholder:
You will have the right to vote when it is time to make important decisions in the company, from acquisitions and mergers to stock liquidation.
This right can be exercised when shareholders’ meetings are held, being able to vote in person or remotely.
Ownership of assets
Investing in companies makes you the rightful owner of valuable assets. This means that, if they increase in value, you can benefit from that, being entitled to receive a payment in case they are liquidated.
This right will gain value when you seek to sell shares or want to collect dividends, as your ownership will allow you to take advantage of the underlying earnings on the company’s assets.
Right to transfer ownership
When you buy shares, you also buy the right to transfer or sell them at a later date if you wish, just as you can do with other properties. This right is acquired immediately at the moment you buy shares and is exactly what has created the liquidity with which the market works.
As a consequence, shares are bought and sold immediately, while other assets are subject to illiquidity, such as real estate.
When you own shares in the stock market you are able to enjoy the dividend payments that can be made thanks to the good performance of the company.
Dividends are nothing more than the equitable distribution of the company’s net profits and are distributed in previously agreed periods. Then, the distribution occurs when the company decides to grant dividends, which is commonly the case with value shares and consolidated companies, although they are not obliged to do so.
Right to review corporate documents
Shareholders are entitled to receive corporate information pertaining to the company. This information and documents correspond to the bylaws and the minutes of the shareholders’ meeting.
In addition, companies are required to file financial reports with the SEC (Securities and Exchange Commission) on a quarterly basis, which must be accompanied by the company’s annual reports.
In addition, the aforementioned documents also include the bylaws of the structure of an ETF, an exchange-traded fund, which shareholders must receive whenever the portfolio structure is changed.
Right to demand
Ownership of the shares will allow you to make claims in the event of irregularities within the company, breach of any part of the contract entered into with you, or failure to make payments after a declaration of administrative bankruptcy.
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How to choose the right company to invest in?
Deciding in which company to place your trust is a process that we will describe as “very personal”. In this, you must know and study in depth the nature of the company and its financial and commercial objectives.
When you find a company that meets your expectations, either by its nature or financial stability, start the process of finding out if it is really the right one to invest in.
Similarly, in this process, fundamental stock analysis comes into play to give an idea and speculate on the stock price in the future.
This is important insofar as we know that the interest in the company must be based on data that indicate its good performance, since the trust you place in the company will not be enough for the shares to rise in price.
How to know when to buy shares?
Investing in companies implies knowing when to buy or sell shares. Closely related to the previous section, it has to do with the company’s performance.
Thus, in order to know which is the right moment, we recommend you to establish profit or loss goals that will allow you to evaluate the situation very well. This is something you can do with the different types of orders that are available to buy shares. That way, you can make good decisions without the noise of rising or falling stocks influencing your decision.
That said, it is always advisable to take into account some aspects that may influence your decision:
Respect market cycles, as the market has experienced pronounced changes and we recommend that you take some distance to objectively evaluate your position. This will help you avoid buying stocks whose value has gone down in the hope that it will go up again.
Avoid the fear of being excluded. This behavior can lead you to make hasty decisions when the market is rising and you will end up buying stocks that have appreciated rapidly, but it is only because of popularity. It is important that you are patient to avoid losses without being able to notice it.
Don’t go by hunches. The market is driven by fundamentals and data, not by what you think will happen. That’s why we recommend you focus your research on data such as debt, PE Ratio and the company’s most recent performance.
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7 tips to consider before investing in companies
Now that you know all the above, we will give you 7 tips to make the right decision when investing in companies and to be happy with your decision once you are an investor and partner in the business:
Define your maximum loss tolerance limit.
You must know very well how much you are willing to lose if you invest in a company. Let’s say you are willing to put 70,000 euros at risk, but you must analyze the possibility that, perhaps, being inside the company, you should invest a little more money.
It often happens that the lack of financial knowledge or the overly positive attitude of the partners leads investors to underestimate the actual capital requirements of the company.
If the money they ask for is not enough and you are already in the business, you may feel obliged, in your own interest as an investor, to invest much more money or look for another partner to back you up.
2. What will the capital you contribute be invested in?
A very important aspect is what the capital or resources you are contributing will be invested in. It is important that, if you have the opportunity, you ask the partners how they determine that the capital they need is the one they mention. It would not apply if the shares and their price are already published in a broker.
Now, the resources you contribute are generally destined to:
Increase working capital; that is, money that will be used to finance loans to customers, to increase inventories or to reduce accounts payable to suppliers.
Capital expenditures, which are understood as improvements or expansion of facilities, purchase or renewal of machinery and/or fleet of vehicles, opening of new branches, research and development, among others.
Paying overdue installments on bank loans, which includes debt repayment and accrued interest. At times, this may include the payment of debts owed to other partners, a situation that leaves much food for thought.
3. Review the tools for financial control available to members
Check if the company has an accounting system that you trust: if the accounting system works correctly, if it has financial statements that reflect the company’s reality, you can check how they manage the company’s cash flow and treasury.
It is also worthwhile to inquire about the internal controls they implement with respect to accounts receivable and payable, inventories, loans and non-commercial budgets.
In short, if possible, we advise you to review your finances for the last three years.
4. Try to establish contact with the partners and managers of the company.
It is not always possible for you to make a personal or virtual contact with your future business partners. However, we advise you to study about them. Find out about their principles, if they are honest, capable, if they have achievements, if they are brilliant.
Keep in mind that you may make a small or medium investment today, but tomorrow it may be more. Remember that it is not enough to have charisma, vision and great plans; you need capacity, knowledge, talents, commitment, etc., all that is what makes a really successful entrepreneur.
5. Have experts in different specialties accompany you
The best thing you can do is to get advice from professionals, other entrepreneurs or colleagues to dig deeper into specific topics. Let’s take an example:
An experienced financier can help evaluate and advise you on the company’s finances and accounting.
A lawyer in commercial law will help you verify the corporate agreement and the company’s status in terms of the various formal duties incumbent upon it.
A public worker can help you check how up to date the company is with its tax and other governmental responsibilities, as well as with its labor obligations.
6. Research and find out where the business wants to go.
If you are not an expert or do not know for sure the direction the company wants to take or what they want to invest your money in, we recommend you do some research.
Exchange opinions with knowledgeable customers, entrepreneurs or suppliers. Know well the niche to which your company offers products and/or services.
Having two businesses is all well and good, but having more than one niche will paint a totally different picture.
7. Define how much control you will have
Whatever the type of company, one of the keys to success lies in the way decisions are made, and these depend on the controls and information taken into account to make them.
Corporations have a Board of Directors, a Board of Directors or a Shareholders’ Meeting, where strategic decisions are made for the company and are usually held once.
They are attended by the General Manager, who presents the financial statements with his CFO or the Accountant. The Manager is also responsible for reporting on the company’s achievements for the recently completed month in order to make other important decisions.
We recommend that you participate as much as possible in the organization of the company and, at least once a week, in the General Committee meetings where you will see the most operational issues of the business.
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Everyone wants to invest in companies with a profitable business model, but it is not an easy task. It requires reflection and a strategic mindset to help make the best decision. Fortunately, in TAS Consulting we have the mission to advise you in these moments and help you make the best decision when it comes to investing your money. Do you need advice or create your own company? Contact us at firstname.lastname@example.org and our professionals will be happy to help you.