How to choose a company to invest inHow to choose a company to invest in

It’s about choosing things that give you a shot at the returns you want within your investment horizon, while taking risks you’re comfortable with. Here are some tips to help you choose a company to invest in.

Understand how you might make money

Investing in companies can give two different kinds of returns:

1. Income, when companies give shareholders dividends (a share of the profits), or

2. Capital gain, when shareholders sell their shares for more than they paid for them.

This isn’t an either/or situation—rather, it’s a spectrum. Some companies give a large portion of their profits back to their shareholders, and invest just a little bit in growth, while other companies invest more in future growth, and don’t give as much back to shareholders as dividends. But remember, you’re not guaranteed to make money—some companies won’t pay dividends or increase in value.  

You may also want to look at the different tax implications for different companies. These may be different, so you may want to seek advice. After all, the taxes you pay can ultimately affect your returns. 

Review your current portfolio

It’s worth understanding if investing in companies makes sense for you and your portfolio. To do that, you’ll want to understand how diversified your portfolio is, and how much risk you're exposed to. 

Diversification refers to how many different things you’re investing in. For example, if you’ve invested in one tech company, investing in several other investments that operate in different industries would diversify your portfolio. On the other hand, if you already invest in exchange-traded funds (ETFs) or managed funds, you might already feel well diversified and not want to add companies into the mix. 

Another reason why people might invest in companies is to expose their portfolio to more risk. Buying shares in a company is considered a higher-risk investment because companies are more likely to experience significant fluctuations in value due to factors like market volatility and financial instability. Adding a company to your portfolio can increase your chance of achieving higher returns over the long term, but also increases your chance of losing the money you started with—so you should think about your risk appetite before you invest. 

Find a company that interests you  

There are lots of companies you can choose from on Sharesies. If you already know what you’re looking for, head to Explore and enter the name in the search bar. You can also filter your search to help you find what you’re looking for. 

To discover new investments, you could try our AI-powered search tool, AI Search, which is designed to help you gain industry insights and find investments based on your interests.  

Check the company’s past performance

This section has to come with a bit of a warning: remember that you cannot predict the future. Any company can gain or lose lots of value tomorrow, regardless of what it’s done for the last 10 days, months or years. Past performance does not predict future results.

Having said that, if you look at how a company has performed over time, you can get a bit of an idea of what to expect. For example, let’s say you have two companies. Over the past five years, the first company’s share price has hovered around $3 per share. It’s gone up to $3.20 before, and it’s gone down to $2.90, but it has never moved any further than this in either direction. It’s been pretty stable.

The second company is a different story. It was $4 per share last month, $6 per share the month before that, $2 per share before that, and a whopping $10 per share the month before that! It’s all over the place.

Now, you cannot predict what’s going to happen tomorrow. But the second company is more likely to have a big move in either direction than the first company. You can’t predict an exact price, but you can get a decent idea of how volatile a company’s share price is. This is important for assessing how risky a company is—in general, companies with more volatile share prices tend to be higher risk, but also give you a shot at higher returns.

You can also look at news reports about a company. Have they been doing what they said they were going to do? Have they met any targets they set for themselves? These things are important, and can give an indication of how well they’re performing.

Put your existing knowledge to work

Everyone has specialised knowledge of some variety. You might work in a particular industry, or be especially interested in a certain product or technology. The point is, investing in companies is an opportunity for you to put your knowledge and experience to work. If you don’t have this knowledge yourself, think about doing some research externally and learning more about what makes the company tick.

Compare the company to your values

Once you’ve narrowed down your search, think about how each company makes you feel. Are there companies that you support and want to see thrive in the future? Are there companies with an ethical approach that really matches your values? 

These are worth thinking about, because investing isn’t just about dollars and cents. It’s also about supporting companies that you want to see succeed in the future.

Wrapping up

Now that we’ve worked through it, you can see that investing in companies comes down to looking at your risk tolerance, your goals, your investment horizon, and your values. So have a think about these things and you’ll be able to work out investing in companies feels right for you.