Investing in green companies and securities is a good way to make the world a better place. However, being a socially conscious investor isn’t enough. There are two reasons that you also need to make sure that you make smart decisions when investing in green initiatives:
- You still need to make money. Your own financial stability is important.
- The future of the green movement depends on the best companies surviving. If you choose to invest in dependable green companies, then they can thrive and change the world for the better. If you choose to invest in subpar green companies, they will fail and less capital will be available for the companies that could actually make a difference.
As a beginner investor, the idea of putting your money to work and realizing a return on your investment can be extremely appealing. Granted, this is a great way to build your financial portfolio and start accumulating wealth. But just keep in mind that there is a certain element of risk involved and there may not always be a pot of gold at the other end of the rainbow. It’s just as easy to lose everything as it is to gain considerable wealth. Furthermore, there are certain mistakes that beginners commonly make. Here are the main ones to avoid.
Don’t let low prices deceive you –
Let’s say that you have the option to invest in a green stock that is selling at $20 and another that is selling for $50. Which is the smarter bet? The unfortunate answer is that you can’t know without more information.
Just because a stock is cheap and you can afford it doesn’t mean that it has there is the potential to realize a return on your investment. Making the right investment is all about value. For instance, in terms of the potential for a return, a higher priced stock could offer significant value. Although investing in a cheap penny stock could be tempting, it could turn out to be the worst investment you ever make.
You will need to do a stock valuation analysis to find out whether an investment is appropriately priced. There are a lot of different types of stock valuation models that you can use. These include the PE, dividend discount and discounted cash flow models.
Not balancing the risks with potential returns – any successful investor will tell you that you have to balance your risk with the potential return. Most Investors Hangout members will tell you that no matter how attractive an investment looks, you have to consider the risks involved and not to invest money that you cannot afford to lose.
Not considering your own aversion to risk – Putting your money in green investments can make you feel better, but you should never lose sight of your capacity of taking financial risks or your risk tolerance level. If you can’t handle the stock market’s many ups and downs or its volatility, stick with an established company’s blue chip stocks rather than investing in a start-up enterprise that could be more volatile.
You can learn more about risk aversion at the Economic Times. Keep in mind that everybody’s risk aversion rate is different.
Not diversifying – diversification is vital to building a profitable investment portfolio. Remember the old adage “never put all of your eggs in one basket?” A diversified portfolio comprised of varied investments helps you avoid overexposure and protects you if one of your investments should fail or lose money. It acts like a safety net for your long term investments.
Not doing your homework – the key to making the right investment is research, pure and simple. Research is what helps you understand more about the investment you’re considering and learn what it entails. For example, if you want to invest in a particular stock, it’s wise to research that company as well as its business goals and plans.
Not having a time frame – never make an investment without having a time frame in mind. If the investment you’re making will go towards buying a home, you’d be looking at a medium-term time frame. However, if you’re making that investment to fund your child’s college education, you’re looking at a long-term time frame.
Most importantly, it’s not gambling or speculation – when making investments, be careful that you don’t confuse investing with gambling or speculation. If you’re blindly choosing a stock or reacting to a hot tip, that isn’t investing. Investing means being comfortable with an investment decision you’ve made and sticking with it, even if it’s for the long term.