When investing money, it is extremely important to be well-informed. Before buying, ask these important questions to help you understand how the investment works and what costs and risks are associated with it.
Here are some important questions to ask before investing money:
- How does the investment make money? Does it pay dividends or interest?
- What fees or commissions do you have to pay to buy, hold and sell the investment?
- What effect will these fees have on the overall value of your portfolio? Is it better to pay fees out-of-pocket or from your investment portfolio? Are these fees tax deductible?
- What has to happen for the investment to increase in value? How much does the investment have to increase in value in order for you to break even or make money after all the fees are paid?
- What specific risks are associated with this investment? What effect would a change in interest rate, a recession or market changes have on the value of your investment?
- How easy would it be to sell the investment if you needed your money right away? Are there restrictions on how long you must hold the investment or are there penalties for selling the investment early?
- Does the investment suit your goals and risk tolerance? Understanding your tolerance for risk will help you choose investments that are right for you and your financial situation.
Make sure you understand the company’s business and whether it is making or losing money. If you are unfamiliar with reading and interpreting financial statements, ask your financial adviser or accountant to review them with you.
- How long has the company been in business? (Investing money in a company with little or no history or published information may involve more risk.)
- Is the company making money?
- What could affect the company’s performance?
- Are there any red flags in the financial statements? (This could include increased expenses with no increase in sales, or negative cash flow.)
- How is the company managed? Are there any ongoing legal issues with the company?
Where to find the answers
Disclosure documents such as a prospectus or annual report can be a good source of
information. A prospectus contains facts about the securities being offered to the public. It includes information about the history of the issuer of the securities and its operations, a
description of the securities being offered, financial statements, a summary of the major risk factors that affect the issuer and how the money raised by issuing the securities will be used.
Your financial adviser can provide you with disclosure documents or you can download public company’s or investment fund’s disclosure documents from SEDAR at www.sedar.com. The fact that a company files documents with the FCNB does not guarantee that it is a good investment. You still need to carefully choose your investments and who you deal with.
You can also find information about the companies you invest in from a variety of other sources including media, newsletters, analysts’ reports and the company itself. Remember, this information only forms part of the overall picture of the company. Be critical of what you read and never base your decision solely on websites, unsolicited emails or company news releases. Staying informed after you invest also helps you protect your money.
Check before you Invest
Although most financial advisers are honest and working in your best interest, you still need to carefully choose who you deal with and verify the investments you are considering. Registration helps protect investors because FCNB will only register firms and individuals if they are properly qualified and meet a certain standard.
Read more about Working with a financial adviser, and use the Five Steps to Choosing an Advisor (PDF) to record your findings.