What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


5 Questions to Ask When Investing

Original post by Colleen Reinhart of Demand Media

A smart investor is an informed investor, but you can't be informed if you don't ask the right questions. Even when dealing with someone you trust, the onus is on you to protect yourself and your hard-earned cash. Make sure your money's in the right place by understanding your investments before you sign the dotted line.

Contents

What are Your Credentials and History?

Reputable brokers should be registered with your state's securities regulator, while advisers are either state- or SEC-regulated, depending on their size. You should also ask about past disciplinary action taken against the investment professional. If you're wary of a broker or adviser's background, take your concerns to the Financial Industry Regulatory Authority's BrokerCheck website or to the Investment Adviser Public Disclosure website to search for past misconduct. Other answers to get include the person's background and experience, and how they get paid for their work. Advisers and brokers paid on commission are more likely to suggest investments that aren't in your best interest.

Could You Please Describe This Investment?

Before investing, you should know what you're buying and how you make money by owning it. Ask if you can expect dividends, interest, capital gains or some combination of the three. If you're purchasing a mutual fund, review the profile of the companies included to make sure you aren't putting too much cash into one industry. Managing investment risk is all about diversity. When investing in stock, healthy cash flow, high sales numbers, solid profitability and relatively low debt are all signs of a promising pick.

How Risky Is It?

To get a higher return on investment, you need to take on more risk, but your investment also needs to match your risk tolerance, which is dependent on your investment goals. For example, you can't afford to have your entire retirement nest egg shrink away to nothing, but maybe you're okay with the prospect of losing some of it if higher growth is possible. Describe your investment goals to your broker or adviser, then tell him you want to develop a strategy in keeping with those objectives. Review mutual fund past performance for volatility. Read up on company histories. Larger, more well established companies make safer investments than start-ups. Make sure you understand what you could lose.

What Are the Returns and Costs?

Unless you put your money in a savings account or bond with a guaranteed return, your adviser can't tell you exactly how much you'll earn from your investment, although he can give you an idea. Look for mutual funds that increase in value over the long term. Ask to compare the fund's performance with that of other, similar investment products. Understand the costs of investing, too. Inquire what extra fees go with purchasing, holding and selling the investment, and whether any of those add-on costs are avoidable.

How Do I Get My Money?

Even if you plan to invest for the long-term, you need to know the conditions for withdrawing money from your investment. If you want to treat your investment as an emergency fund, for example, you want it to be very liquid -- easily cashed in on short notice. If the investment locks your money in for a period of time, see if it's possible to unlock your cash by paying a penalty or forgoing earned interest. Make sure you know what will happen to your money at the end of the investment period. If you want to withdraw your money at that point, you don't want your adviser reinvesting it automatically.


                   

Resources

References

About the Author

Colleen Reinhart began her writing career in 2006. She has worked as a technical writer for numerous companies, including Autodesk, and she worked as a marketing writer for Open Text in Waterloo, Ontario. Reinhart has a Bachelor of Arts in rhetoric and professional writing from the University of Waterloo.


Advertisement