Whether you're an avid investor or not, you are likely familiar with the mantra of buy low and sell high. The challenge is that it takes courage and confidence to invest when the market is in a downtrend. Many wealthy Americans see this as a lucrative opportunity to buy assets at a discounted price; however, this segment of investors already has the capital or borrowing capacity needed to make the investments.
Whatever your current financial situation, it is always important to determine your financial goals and risk profile before investing. People nearing retirement age may prefer a more conservative approach, whereas longer-term timeframes lend themselves to more aggressive portfolio allocations. All but the most conservative portfolios should consider a significant allocation to equities in public companies. These investments can have advantages in terms of liquidity, visibility, and oversight that other asset classes simply cannot offer. Liquidity may not seem important at first glance; however, you'll be glad it's there should you need it.
1. Public Markets Can Help Protect Liquidity
A wide range of investment opportunities are available, so why should public companies be considered over other asset classes? A key benefit is that they can provide significantly more liquidity than private companies or other similar asset classes. While many investors set goals around long-term financial stability, it is always possible that your financial condition could change. Cash flow may not be an issue at the moment; however, unplanned expenses or situations could arise which would require taking money out of your investments.
You can always decide to get out of the investment if needed with publicly traded companies. Selling publicly traded stocks on established exchanges enables you to access your money with relative ease. This is in contrast to privately traded companies, where it may be challenging to find a buyer on short notice. Quickly selling a private asset may involve accepting a price below the fair market value to execute the transaction. You can avoid these hurdles if you own equities in public companies.
2. The Dual Benefits of Companies With Dividends
Some companies choose to distribute a portion of corporate profits to shareholders in the form of dividends. Not all investment classes do this, but it is more common among established public companies. Everyone expects the stocks they hold in their portfolio to make money; however, only certain companies provide this income stream to stockholders regularly.
The fact that a company has dividends is typically a sign the business is doing well. For example, Apple and Microsoft are among companies that pay dividends to their shareholders. To do so requires the business has operating profits substantial enough that not all of it needs to be re-invested back into the business. In contrast, early-stage and small-cap companies usually put all of the profits back into the business because growth is essential at that stage. If you prefer safer investments, consider companies with dividends because you know they have a record of generating positive cash flow in the past and are likely to continue doing so.
3. Regulations Provide Checks and Balances
The process of taking a company public is extremely rigorous. There are numerous requirements that a company must satisfy. Each country that permits the listing of shares on an exchange very likely has also had regulators charged with protecting the investing public. It takes many forms, but some key elements are global accounting standards, compliance with the U.S. Securities and Exchange Commission (SEC) or equivalent, and state and country governing laws where the company is domiciled. Suffice it to say, this process continues to improve, and all of these measures are designed to provide protection for investors. Given the level of scrutiny, a significant investment of time and resources are required from the company. Thus, only those confident in their business plan choose to go down this path.
The regulations require that publicly traded companies make key corporate information available for investors to review. In addition to the financials, and management, potential investors can also review a company's board of directors to see who is guiding the organization. Board members with Fortune 500 experience offer a different perspective than those who have never occupied a seat on a corporate board before. All of this information is available to help investors make informed decisions before purchasing any stock.
Keep in mind, however, that not all public companies have the same level of risk. Younger companies have less of a history to evaluate; thus, it is more difficult to predict how they will perform in the future. It is unlikely a stable, large-cap stock will double anytime soon, whereas small companies offer higher possible rates of return.
Exchange-traded funds (ETF) are an alternative providing the ability to invest in an entire industry, such as energy or technology. For a marginal extra cost, these instruments offer a blended return along with many of the same benefits and protections of direct investments in public companies. A nice advantage of this approach is that no research is required. Some ETFs offer a ratio of debt and equity to better align with your risk profile.
You can always choose to leave your money in the bank, but you may be missing out on opportunities to strengthen your financial future. Every investment involves some risk, but given a chance to make well-informed investment decisions with historically stable returns over the long run, would you take it?
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Uncommon Knowledge
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
