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How To Invest In Companies Like A Pro

For a newcomer, investing in companies can feel intimidating, especially when you first see all the available options. Many beginning investors decide to look to the stock market to find shares of public companies—but that doesn’t always work to your advantage. 

If you’re looking to invest in companies directly, follow other investors with Public

Private companies and startups can provide an even more lucrative investment over time—plus, you’re more likely to find a private company that aligns with your values if you do your research right. 

When you’re ready to invest, consider balancing your portfolio with privately traded companies and public ones. Look for companies that allow direct investment so you can grow your wealth.

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How to invest in private companies and small businesses

While not all private companies are small businesses and vice versa, they have similar investing processes. Regardless of its size, it needs to prove that it has the growth potential required to sell shares to shareholders.

In both cases, you need to invest in the company directly. That means that instead of purchasing stock on a stock exchange, you deal with the private business itself.

Private companies and small businesses each offer unique advantages over public company investments. You get to create a relationship with the business owners, and you have more say in the company’s inner workings. For example, you get to help decide who gets elected to the board of directors for that business, and you may even join the board yourself.

Regardless of whether you decide to invest in a small business or a larger private company, the process of choosing the right company remains the same.

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Credito avalado con tu coche

Entre 1.000€ y 15.000€

Al rellenar el formulario de solicitud tendrás que facilitar la marca y modelo de tu vehículo. En función de ello, en la misma pantalla, recibirás una oferta por tu vehículo

Find companies to invest in

There is no shortage of companies you can invest in, no matter how much or how little experience you have in the market. However, finding them takes time and research.

Many platforms across the web offer information about startups as well as small and private companies. Platforms like Equities, Crunchbase, and Crowdfund Insider have information on these companies, and a simple search can show you private companies and potential investment opportunities.

Here’s where you’ll run into some differences between public and private companies. While public companies must file their financial information with the SEC, private companies do not. That can make finding that information a bit more challenging for you—but not impossible. Many private companies still file with the SEC, and Crowdfund Insider lists their filings for investors. 

Meet with the owners

According to the U.S. Small Business Administration, securing investors is among the first and most essential steps to building a business. Before you decide to invest in a private company, talk to the owners, and establish a relationship. When you find a private company that shows growth and sound business practices, make a list of questions to ask the owners.

Ask about their business plan since that will show their potential for further growth and indicate their ability to adapt to changes like inflation, recession, and other challenges.

Look at their financial statements, market, corporate governance documents, and other relevant information. Talking with the owners can also help you verify information that can be more difficult to find, like their financials.

Ask detailed questions when you meet with the owner. Go beyond the fundamentals, and discuss:

  • Who uses their product and why it’s successful.
  • How their product will change their market.
  • Business mistakes and how they’ve recovered from them.
  • Who else backs them and believes in their potential.

Research their operating models

A company’s operating model and financials are the most transparent ways to predict future growth and business performance. According to the Corporate Finance Institute, a financial model can be as simple as a spreadsheet that forecasts a company’s financials based on its history.

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You wouldn’t buy a business’s product if it didn’t work. The same concept goes for the company itself. If it does not have a successful operating model or show positive growth, it’s not a worthwhile investment.

A good financial model should show:

  • Budgeting capability.
  • Debt and equity.
  • Asset acquisitions.
  • Allocation of funds.

This model should also show you where the company gets its funds, its market value, and whatever critical resources needed for it to achieve its business goals.

On the other hand, the company’s operating model should tell you how it utilizes its various components to create success. Those can include employee skills, technology, company policies, and organization. 

Knowing about a company’s robust operating model shows whether it can meet challenges and continue to provide quality products or services. The model also indicates whether the company will use your investment wisely.

Negotiate your investment terms

When you invest in a private company, you get an advantage that is lacking with public companies. Instead of purchasing stocks on the public market, you have the opportunity to negotiate your investment terms.

Negotiating terms goes beyond getting the right price—even though that is part of the deal. When you negotiate, you should ask questions about participatory and safeguarding measures such as:

  • How will the company use my investment?
  • Will the company pay me dividends or a portion of its profit?
  • How will the company communicate with its investors?
  • Will I be able to participate as a board member?
  • Do I get to vote on company decisions?
  • Will the company ask for my approval for spending more than a certain amount?
  • What is your exit strategy?

You should also know whether you want to make a debt investment or an equity investment. While both can turn into lucrative ventures for you, they differ in how you buy and sell them. You’ll also need to adjust your investment strategy based upon which one you want to focus on.

Debt investment

Debt investments offer low risk for low returns. Without the volatility and liquidity of other markets, like stocks, they offer a more consistent—but slower—way to build wealth.

Purchasing bonds also means that you will get paid before other shareholders and debt collectors even if a company liquidates. 

Equity investment

Equity investments—which you probably know better as stocks—fluctuate more than debt investments. They have high liquidity, higher risk, and more potential for investor gains.

With equity, you own a share of the company, and the value of that share rises or falls based on the company’s success. However, equity investments make it easier for you to lose money since there’s no guarantee you’ll get paid if the company goes under.

Unlike debt investments, the value of equity investments comes from factors beyond the company’s performance. Governmental policies, the political climate, and social issues all contribute to equity value.

Which is better?

It’s impossible to say whether debt or equity investments are inherently better. Each has a unique potential for risks and gains, and the one you decide upon depends on your financial situation and preferred risk allowance.

If you want to save for your child’s college fund, for instance, you may want to stick with debt investments. That way, you’ll get a steady, low-risk return on your investment.

However, if you enjoy fast-paced investing, can afford to lose money, and want to benefit quickly—equity investments may work better for you.

Finalize your deal

Once you’ve negotiated your terms with the company, you can close on your investment. At this point, you’ll see more paperwork, even if you’ve already signed a non-disclosure agreement (NDA) and other confidentiality documents before now.

When you purchase a share of a company, you can expect to read and sign the following agreements:

  • Term Sheet.
  • Stock Purchase Agreement.
  • Disclosure Schedule.
  • Registration Rights Agreement.
  • Voting Agreement.
  • Right of First Refusal and Co-Sale Agreement.
  • Certificate of Incorporation.
  • Legal Opinion.
  • Accredited Investor Certification.
  • Signature Pages.

If it seems like a lot, it is. However, these agreements exist to protect both you and the company in which you’re investing. By reviewing and signing them, you can talk with the company’s owner about your terms and learn what your investment means for both of you.

How to invest in socially responsible companies

Invest Like A Pro: How To Invest In Companies - How to invest in socially responsible companies

More than ever before, investors are making an effort to put their money into companies representing the values they adopt. Socially responsible investing (SRI) means paying attention to a company’s social and environmental activities to ensure they align with yours.

How can you tell whether a company is socially responsible? It’s hard to know whether a company genuinely has these values based on their word alone. Besides doing your research on a company, you can use robo-advisors and investing apps to determine a company’s social responsibility.

Use a robo-advisor

A robo-advisor can do more than tell you how to spend your money. Many robo-advisors help you build an SRI portfolio by finding socially responsible companies to create it.

You get the same benefits that you would with a general portfolio, and some robo-advisors give you extra perks. If you decide to use a robo-advisor, check out ones that offer services specifically for SRI portfolios, like these:

Betterment

Invest Like A Pro: How To Invest In Companies - BettermentBetterment offers more exposure to socially responsible companies and maintains low fees on its platform. At only 0.25% per year for their Digital plan, you can discover socially responsible companies without the high prices other platforms charge for SRI portfolios.

Betterment reduces the time you spend searching for socially responsible companies by putting them at the top of their algorithm. It gives you SRI alternatives for large-cap stocks and emerging and developed stocks using low-cost exchange-traded funds (ETFs).

By lowering the number of hoops you have to jump through for SRI, Betterment makes it possible for investors to choose companies that benefit the environment, social causes, and other areas that matter to them.

Wealthsimple

Invest Like A Pro: How To Invest In Companies - WealthsimpleWealthsimple targets investor preferences more closely than other robo-advisors, allowing you to search for socially responsible companies representing issues you care about.

Suppose you are a follower of Islam, for example. In that case, you can build a Halal portfolio and find companies that align with any of six social and economic areas, from low carbon exposure to affordable housing and gender diversity.

Personal Capital

Invest Like A Pro: How To Invest In Companies - Personal CapitalPersonal Capital uses Environmental, Social, and Governance (ESG), partnering with Sustainalytics to bring you the most socially responsible companies in six asset classes.

It tailors the companies it shows you based on ratings from Sustainalytics, so you know the companies in which you’re investing will have a minimal negative impact on environmental and social areas. 

One consideration, though, is that while Personal Capital avoids companies with many ecologically harmful practices, it will limit your portfolio’s diversity.

For example, Personal Capital doesn’t show you many companies in the energy sector since so many of them deal with fossil fuels. Because energy is a significant portfolio component for most investors, you may need to look elsewhere if you decide you need more in the energy sector. However, the situation presents a difficult decision if you feel strongly about sustainable energy.

Other methods

While robo-advisors are one of the easiest ways to discover socially responsible companies to add to your portfolio, you can also do your own research to find them. When searching for SRI companies, start by looking at their business practices and how they invest their funds.

When you research a company, consider the following:

  • Teamwork and relationships. Do they value their relationships with their employees, partners, and investors? Many socially responsible companies care about their business’s human aspect as much as they do their bottom line. For example, if they respect their employees and reward their performance, they are more likely to care about other aspects of social responsibility.
  • Commitment fulfillment. When a company keeps its word, you are more likely to trust it to honor its commitments. Honest companies often stick to that philosophy of social responsibility in their practices.
  • Active involvement. By taking a proactive stance to support social justice issues, a company that stays more actively involved is more likely to grow. Many of these companies also fight harder to find new and innovative ways to be socially responsible.
  • Community involvement. When a company gets involved in its community, it understands its needs. Companies that give back to their communities also have higher SRI ratings than those that focus more on company gain.
  • Customer understanding. Companies should understand their customer bases—for more than their revenue purposes. By showing that they know what their customers need, these companies also become more responsible in what they produce and how they provide it.

How to invest in publicly traded companies

Invest Like A Pro: How To Invest In Companies - How to invest in publicly traded companies

Many new investors start with publicly traded companies. While going this route offers many advantages, it’s not always better than investing in private companies.

Publicly traded companies have to register with the SEC, which means you can find their financials and do more thorough research before you even talk to the owners. The public trading market is also less personal, and you have less—if any—opportunity to negotiate before you buy.

Online brokers

Invest Like A Pro: How To Invest In Companies - Robinhood

You can buy shares of publicly-traded companies on stock market exchanges such as the New York Stock Exchange (NYSE). Using an online broker such as Robinhood allows you to invest using an entirely online, making the investment process more convenient.

With an online trading platform, you can invest in stocks, ETFs, and options, and with Robinhood, you can even buy and sell cryptocurrencies. When you open an online brokerage account, consider the type of account you need before you jump in. Each one has different features, costs, and even minimum investments.

For example, Robinhood charges no commissions and you can get started for as little as $1. Robinhood also lets you invest in fractional shares. Simply input the amount you want to invest in each stock and the app will divide it into parts of a share.

Advertiser Disclosure – This advertisement contains information and materials provided by Robinhood Financial LLC and its affiliates (“Robinhood”) and MoneyUnder30, a third party not affiliated with Robinhood. All investments involve risk and the past performance of a security, or financial product does not guarantee future results or returns. Securities offered through Robinhood Financial LLC and Robinhood Securities LLC, which are members of FINRA and SIPC. MoneyUnder30 is not a member of FINRA or SIPC.”

Invest Like A Pro: How To Invest In Companies - Public

Other platforms like the Public app offer even greater convenience. Public has no minimums, and it’s free to use. It also has fractional investing, a rare find, coupled with a free platform—most brokerages offer either free or fractional investing, but not both.

Public’s most unique feature is the way it lets you interact with other investors. You can follow more experienced traders to learn how to improve your strategy and portfolio, and you have access to everything on your phone.

When you use an online broker, you usually manage your own portfolio. That makes online brokers better for more experienced investors, although many beginners also choose them for their accessibility and low fees.

Once you find a stock you want to purchase, you can select a market order or limit order. A market order lets you buy the stock at the current market price. A limit order allows you to name a price you want to pay for a share—and then you wait to buy it until the stock reaches that number or below.

Robo-advisors

If you need some guidance but don’t want to pay the price that comes with a human financial advisor, a robo-advisor can work just as well. They’ll give you a questionnaire to fill out with your investment preferences and goals and then help you make decisions to build your portfolio optimally.

As a beginner, a robo-advisor can help you choose your portfolio type before you even get started. Robo-advisors offer financial planning tools, portfolio rebalancing, and tax-loss harvesting to manage your investments.

Robo-advisors typically cost far less than a human advisor, averaging 0.25% to 0.50% per year. Compare that to the 1% to 3% commission to work with a person, and you may find that robo-advisors give you more value for your money.

Invest Like A Pro: How To Invest In Companies - Wealthfront

Some robo-advisors, like Wealthfront, work well if you want to keep more hands-off with your investments. They also offer free financial tools, even if you don’t have an account with them. Their low 0.25% management fees make it easier for new investors—and they offer free portfolio rebalancing, which is also great for beginner investors that don’t want the headache of having to constantly stay on top of their portfolio.

Financial advisors

Despite the advantages of robo-advisors, human advisors can give you more personalized advice, which can be an asset to new investors. A financial advisor will talk with you about your investing goals and help you build a portfolio from there.

Financial advisors can tell you how much of your portfolio should be company stocks versus how much you should dedicate to bonds, commodities, and other types of investments.

Make sure you research your financial advisor before you work with them, as some of them don’t disclose all their information. The Paladin Registry is a great place to start. They can help connect you to an advisor in your area and in your price range. 

How to invest in startups

Invest Like A Pro: How To Invest In Companies - How to invest in startups

Not all investors want to take the risk that comes with investing in startups. However, that doesn’t make startups a losing option for everyone.

U.S. News & World Report says that, when backing a startup, you probably won’t see a return on your investment for at least ten years. Make sure that if you decide to invest in a startup, you have time to wait and a higher risk allowance.

And according to data from Small Business Trends, about 44% of small businesses fail by their fourth year. That lowers the likelihood of a successful investment on your part and can mean significant losses.

Before you invest in a startup, research the company and its business plan. Talk to the owners just as you would with an established private company, and ask questions about their operating model and whether they have other investors.

You can typically invest in startups in a few ways:

  • Crowdfunding online.
  • Pre-IPO opportunities.
  • Buying equity with a local company.

Each of these methods can build your investment over time, but their success often depends on how well the company you select performs.

Crowdfunding

Crowdfunding can present an accessible opportunity for beginning investors to participate in startup ventures. These involve less negotiation since you contribute funds as part of a large group with set conditions.

Crowdfunding allows you to invest much less than you would if you were to invest directly with the company. For example, if an owner needs $500,000 from investors to start their business, many investors will contribute that amount in exchange for more company control or ownership. On average, investors will fund $25,000 toward a startup.

Even a $25,000 investment may not work for a beginner. However, if you use crowdfunding platforms like SeedInvest and StartEngine, you can start investing with as little as $100.

Pre-IPO opportunities

Before the 2012 Jumpstart Our Business Startups (JOBS) Act, only accredited investors could invest in pre-IPO opportunities. With pre-IPO investments, you now invest in a startup before its initial public offering, giving you an advantage over other investors.

To invest in pre-IPO shares, you may want the help of a financial advisor who can help you find opportunities and decide which ones are worth your money. You can also find resources in the news through banks, using startup platforms, and even networking with people you already know.

Buy equity with a local company

SeedInvest and other startup investment platforms let you buy equity through them, but sometimes you want to have a closer connection with the company in which you invest. Buying equity with a local company often means getting a jump on the competition before other investors find out about it.

Using similar methods that you would with online investments, you can find local investing opportunities. For instance, you can still use crowdfunding, but local investing relies more heavily on networking than online searching.

Joining a Local Investing Opportunities Network (LION) puts you in contact with other investors in your area to help fund startups. The members of these networks don’t typically invest as a group, but they do share opportunities and let investors decide for themselves whether they want to take them.

By joining these groups as a beginner, you can gain access to more knowledgeable investors and learn their methods. Additionally, investing together means getting greater insight from more members, which means more thorough vetting and research than if you were going it alone.

Summary

As a beginning investor, you have almost endless investing options. Whether you want to invest in public or private companies or prefer the local approach, you can find a platform that works for you.

No matter what you choose, do your research, and use all available resources. Over time, you’ll learn which strategies work best for you as you continue to build your portfolio.

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