A common question is, “What is a good investment?”. The question is often asked in the sense that the questioner is looking for a “stock tip” or other “insider” information that will lead to quick and sure profits. What is a good investment is any investment that, in retrospect, makes money. What is a good investment can be projected based upon fundamental analysis of the stock in question. Good, as in profitable, investments can be found in penny stocks and in the household name stocks that have been paying dividends every quarter for a century. What is a good investment will also have to do with the investment horizon and risk tolerance of the investor.
When the investor is looking for stocks at bargain prices knowing which penny stocks to watch is of ultimate importance. Many penny stocks are justifiably selling for pennies. They are not strong companies and will probably not grow. On the other hand there are startup companies that will eventually be household names and previously strong stocks that have the prospect of a profitable comeback. Sorting out the wheat from the chaff will tell the investor which penny stocks to watch. Following the stock the investor will be able to buy at a low point in order to maximize profits when the stock rises.
Many successful long term investors look for a margin of safety in a stock. The margin of safety can be property that the company owns, cash in the bank, or ownership of assets in other companies. The margin of safety protects the stock price in times of recession and even stock market crashes. This concept goes back to the days after the 1929 stock market crash and the Great Depression. Many investors had “played” the stock market like they might have played roulette at a casino. The concepts of intrinsic value and a margin of safety replaced the gambling mentality of many investors. Those who embraced the new concepts realized that what is a good investment is a solid company with good prospects and these investors profited. An investor’s strategy can be investing in innovation in biotech or investing in shortages such as in energy products after a disaster such as the recent BP oil spill. In either case the investor will use fundamental analysis to project the profits and stability seen in a good long term investment.
Investors interested in a shorter timeline will find that what is a good investment can often be a stock in a company that is not especially stable or one that has just developed products that may result in a price jump. This sort of investing is more strongly tied to technical analysis of the market and profits are typically short term. In other words the investor will buy an undervalued stock, wait for it to rise in price, and then sell, taking the capital gain. At times when the economy is growing investing in oil can be profitable in this regard. Oil prices, and the price of oil stocks, can go up dramatically. An investor may not want to own oil stocks over the long term but may profit from a short term jump in prices. As always the point is not to run out and buy an oil stock or a penny stock but to investigate, develop a strategy, and follow through. There after an honest review of investment results is important. We learn in life through our mistakes as much as our successes. Invest and learn from success and mistakes what is a good investment.