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Thread: Making good investment decisions

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    Default Making good investment decisions

    There has been a great deal of media exposure in recent months concerning the performance and future prospects of the finance industry. This proliferation of media exposure has undoubtedly confused investors as to what a safe investment is and where they should invest.

    The key to successful investing in finance companies is to choose your company carefully. Investors must have a feel for the level of risk attached to their investment - it is about asking the right questions of who you are giving your money to.

    Investors also need to be vigilant and ensure they are fully informed before investing. Simply, if you dont like the way a finance company lends dont invest.

    There is a large disparity between the stronger and the weaker finance companies at one end of the spectrum are entities which are stable and well managed. While at the other end, there are companies that may be vulnerable to market fluctuations. A comparable benchmark can make it difficult for investors to compare finance companies.

    Credit ratings are very important to assist investors with choosing an investment portfolio. They provide investors with a snapshot of a companys performance as it relates to default risk - ie. the probability of a company not being able to pay back its loans. Credit ratings are denoted with a letter and within this spectrum there are different degrees of each rating - these are sometimes denoted by a plus or negative sign or a number depending on the rating agency.

    However credit ratings do not in themselves represent a pass / fail mark or offer a form of guarantee. They are essentially one important measure of a quality finance company and investors need to use these with other tools to identify the strong performers.

    While the size of operation is an important indicator of stability, it is by no means the only perfect one. A good finance company will also have robust disclosure of all its financial arrangements. Investors need to dig deeper into the financial statements and corporate profile of finance companies but this can be difficult if investors dont know what to look for.

    As a starting point, it helps to know what their lending criteria is. This should be published with few, if any, loans written outside the lending criteria including to related or third parties. Some companies will have taken a further step and published a governance charter - this helps provide certainty for investors and allows them to judge whether we are sticking to how we said we would run our business.

    As a general rule, it is a good idea to avoid financial institutions that lend large volumes of money to related financial institutions or companies. This practice, known as related party lending, can mean that a failure of one company or financial institution can quickly have a ripple effect through the related organisations.

    A good finance company will borrow long term and lend short term, ensuring that a sufficient level of cash stays in the business. They may also have additional external funding lines to ensure they are not dependent on one funding source.

    Strong levels of liquidity are another important feature to look for in a finance company. Liquidity is a term used to describe how easy it is to convert assets to cash. The most liquid asset, and what everything else is compared to, is cash. This is because it can always be used easily and immediately.

    Cash is a company's lifeblood. In other words, a company can have good net earnings, but if it can't collect the actual cash from those it lends to on a timely basis, it will soon fold up, unable to pay its own obligations.

    Investors should always look for a finance company with a well-capitalised balance sheet with high levels of equity and shareholder ownership. A reliable way of getting a measure of this is by looking at the gearing ratio.

    Gearing ratio is another way of looking at equity which is essentially how much a finance company owns of itself, set against how much it borrows. The higher the gearing ratio; the stronger the equity position. The industry average is currently 9.79% (KPMG FIPS survey 2007 based on 2006 financial information) and, at a minimum, investors should look for a gearing ratio that is at least that figure.

    Previous performance, governance structures and board membership are valuable pointers for determining the strength and integrity of a finance company. Asking questions about prior investment decisions will give some indication as to the reliability and trustworthiness of finance companies. Also look into the experience of the board of directors, do they have credible backgrounds, is there a mix of independent directors on the board?

    Year on year growth with a history of profitability are also important features an investor should look for in a finance company. While past performance is no guarantee of future performance it is one indicator of reliability.

    But above all investing is two dimensional - there are risks and there are returns. Sound investment decisions are basically about getting that balance right - investors need to ask: am I getting enough return for this risk? Or given this return, what are my risks and are they appropriate?

    The non-banking financial services sector remains an important contributor to New Zealands economic activity. There is certainly a role for finance companies to deliver on good investment opportunities for investors.

    Five things to look for in a finance company

    Know their lending criteria ask questions like what and where do they lend to and how much have they written off in bad debts? How much lending is deemed related party lending.

    Strong liquidity look for companies that ensure sufficient levels of cash stays with the business.

    Well-capitalised balance sheet level of assets compared to liabilities. Look for a finance company that has cash flowing in more regularly than paid out?

    High gearing Ratio the ratio of owners funds (shareholders) vs your funds (borrowed funds).

    Previous performance good companies are run by experienced and highly skilled people and have a history of profitability.

    You should always read the prospectus as well as the investment statement, it is most likely in the prospectus that you will find the information discussed above. And, when you cannot clearly find the information ring the finance company in question, they should always be able to answer your questions.

    by Kerry Finnigan

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    The best suitable investment decision should be depended, different ppl may have different decisions. But the earning money one is best

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    investing on something need calculate the risk also.
    how many you can afford it each investation you do

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    now the whole world is toward economical problem stock market are geting down and down .is it the right time of investment ?

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    are u talking about investments in forex trading ????

    Quote Originally Posted by crazybird168 View Post
    The best suitable investment decision should be depended, different ppl may have different decisions. But the earning money one is best
    yeah so investing here in forex is a better option bcoz it si different from stock exchange
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    seahawks90
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    Quote Originally Posted by soumyakhatri View Post
    are u talking about investments in forex trading ????



    yeah so investing here in forex is a better option bcoz it si different from stock exchange
    I agree and I must say that forex is better then stock market as we all know that because forex is a market which opens for 24x5 and we will earn foreign currency in forex trading but in stock market we just earn our national currency.

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    Investments are a wise way to increase one's wealth. Irrespective of the income each ones, they can save a portion of their earned money and invest smartly to increase their earnings. Forex is the best place for investments provided you are aware of its risk.

  8. #8
    seahawks90
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    Quote Originally Posted by ashvini View Post
    Investments are a wise way to increase one's wealth. Irrespective of the income each ones, they can save a portion of their earned money and invest smartly to increase their earnings. Forex is the best place for investments provided you are aware of its risk.
    i must say that we must have to spare some money from the profit which we have earned from forex trading and must have to keep the remaining profit aside so that we can use it in hard time. And its true that forex is the best place where you can invest your money but only if you have good knowledge of this field.

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    True compounding a portion of profit is a great way to build a strong portfolio. And also it facilitates for us to use the remaining to pay off our bills.

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    seahawks90
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    i must say that investment is a thing which works as a backup in the field of forex , and it is used in your hard time , but as we all know that forex is a risky business so we must have to take some good investment decisions.

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    before investing in the forex business is indeed better trader must know the first risk of loss and gain what benefits that can be used to understand the workings of the forex business is like.

  12. #12
    seahawks90
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    @puji you are right that first we must have to analyze the risks present in this field before entering it because most of the newbies come in this field without knowing the risk percentage present.

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