by Stacy Francis, CFP®, CDFA
At a barbecue last weekend, a friend told me about this awesome tip he had gotten from his brother-in-law, about a stock that was trading on one of the Canadian exchanges for only $0.20. As it would take very little for the stock to double, he reasoned, he was bound to make money. When I asked him what the company does, he had no idea. This very common type of logic got me thinking about the reasons we use when picking our investments. Below, I will list some excellent ones – along with a few not so excellent.
One wonderful reason for buying a security (be it a mutual fund, a bond, or a stock, or whatnot) is that you believe in the company’s business model. Clients who believe organic groceries are the future many times buy stocks like Whole Foods, and many times do very well.
Another great reason to buy a company is that you share its values. This way, you know your money is in good hands, and contributing toward a better world. Practicing fair trade no longer means high prices and no customers – across the globe, people are taking ethical issues to heart and making purchasing decisions accordingly.
A third reason is that you think the economy is going to work in the company’s favor. When the market is boiling over with demand for a certain product or service, chances are good that companies supplying them will do well.
And finally, a few not so good reasons. The first one is a common one; one I hear all the time. If a fund or stock has done great over the past year, suddenly everyone wants it because it’s “the best one.” The chances you will overpay are high.
The second not so good reason is that – like in my friend’s scenario – the stock is cheap. Sure, if the fundamentals are there, go for it! But don’t buy something just because the price is low, or you may end up learning the hard way why.