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Home Understand your investment
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Written by Administrator   
Friday, 27 March 2009 02:20

Understand your investment!

If you don't understand it, don't invest!

One of the mistakes I made when I first started investing was buying into small or newer companies that I didn't understand. Either I didn't understand their products, I didn't understand their business model, or I didn't understand how they made money, or how they would make money if they weren't profitable already. A good example of this is the biotech industry. I am not personally a molecular biologist, nor do I know anything about the drug industry. So if I read about a small company who has a "promising" drug in the pipeline for treating some disease or condition, it's very hard for me to figure out whether or not the claims have any merit. I've found that with biotech companies, these stocks often move based things like drug trials and studies or clinical data. So, unless I can read these reports and understand what they are saying, it's hard for me to know whether to stay in the stock based on a report, especially if the results of trials are mixed.

Another reason I don't invest in what I don't understand is because it's easier to avoid fads that way. A few years ago the "hot" area to invest in was nanotechnology and for awhile all I heard about these companies is how they were going to change the world, and if you didn't own nanotech stocks you were going to miss out on the greatest thing since the invention of sliced bread. So whatever happened to all those companies? Are they even in business anymore? My point is that you don't hear about nanotechnology anymore and it seemed to just kind of die quietly away. Of course this doesn't mean the technology is dead or doesn't have potential, it just means that apparently it didn't quite measure up to what it was hyped to be.

Invest in what you know

Since I personally have an understanding of technology, it makes more sense for me to stick with technology companies if I am going to invest in a smaller unknown company that has yet to prove itself. Since I have a better pulse on the technology market sometimes it's easier for me to guage what kind of a market there is for a given product. And you can do this yourself. What industry do you work in or have lots of knowledge about? Are you in the biotech industry? Then you might do very well in biotech stocks. How about healthcare? Or insurance? If you are in any of these industries yourself, you have an edge as an investor because you'll have a better understanding of how these businesses work, how they make money, and if they will continue to make money in the future.

The bottom line here is that unless you are going to invest in a large company who's been around for awhile and has a proven business model, think twice before investing in smaller companies if you don't understand them. It might save you lots of money in losses down the road!

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Last Updated on Saturday, 28 March 2009 01:57