How to Minimize Risk When Investing ?
Investing comes with risks. Sometimes those risks are minimal, as is the case with treasury bonds, but other times, such as with stocks, options and commodities, the risk can be substantial. The more risk the investor is willing to take, the more potential for high returns. But great investors know that managing risk is more important than making a profit, and proper risk management is what leads to profitable investing.
If you are going to make a minority investment in a privately-held company is risky, but it can be done successfully.The first step is to make sure that the company is financially sound. However, even if this is true, the pitfalls are numerous.
If you’re looking to raise money for your company, it’s critical you understand your risk profile.
Most investors and lenders, like banks and venture capital firms, are essentially professional risk managers; they invest or lend money by managing the risk that the money will be repaid or not. So, your job when seeking capital is to reduce the investor or lender’s risk as much as possible.
The key to reducing risk is to identify and accomplish “risk mitigating milestones.” A risk mitigating milestone is an event, that when completed, makes your company more likely to succeed.
Below are five key ways that will reduce the risk of your failure and thus make it significantly easier to invest in your company or others businesses.
- Build a team of advisors.
One of the best risk steps to accomplish is building a group of advisors. This is a group of individuals who agree to support and advise your company. Typically you do not pay them cash, but often give them stock options to incentivize them to help you.Your advisory board is typically comprised of industry experts and other professionals whose advice and connections can help you grow the business. By building an advisory board, you show investors that other successful people, often including industry insiders, believe in your vision. Wise investors also know that by soliciting the advice of experts, your company will become more successful.
2.Diversification is king
Diversification is absolutely one of the keys to creating a low risk portfolio. By diversifying, you are not putting all of your “eggs in one basket,” so to speak. Instead, you are spreading your capital across a number of different companies or investments. Investing everything you have into equities for instance can pose more risk than investing in a combination of stocks, bonds, real estate and other commodities.Proper diversification of a stock portfolio would require a fairly large number of different stocks covering a wide variety of companies and a diverse array of industries.
Creating partnerships proves your viability and positions you for success. For example, a distribution partnership could ensure your offering will be able to reach the right customers. A manufacturing partnership could prove your ability to develop your product at a set cost.
In either case, signed partnerships also prove to investors that others in and around your industry believe in your vision.
- Use marketing.
Media outlets will write about your company if, and only if, they think their readers, listeners or viewers will care or benefit. As such, if the media covers your company, it’s a good indication to investors that customers care about what you are doing. And if customers care, there is a good chance they will purchase your offerings in the future.
Social media can be a very useful tool, integrate it with traditional media so you can reduce costs and rise audience(clients)
- Generate revenue.
If there’s enough customer demand for your product or service, the chances of your success are much higher and the risk is lower.
And the best indication that customers really want your product or service is if they buy it. As a result, generating revenues from customers is perhaps the strongest risk mitigating milestone you can accomplish, and best positions you to raise money from lenders and investors.
It is understandable that for certain business ventures, like opening a new restaurant, you can’t get to much clients at once. In such cases, in order to attract new costumers try to accomplish steps that don’t require outside funding as possible so con can minimize financial risk. For example, you could develop your menu, survey customers in your area, and secure permits and licenses to help prove your restaurant will succeed.