A Simple Guide on Investment Due Diligence

Estimated reading time: 3 minutes(Last Updated On: October 1, 2021)

When opening an investment account, it is important to do your due diligence. Investment due diligence will help you make the right investment choice for you. 

Don’t be a victim of investment fraud. Read this simple guide on investment due diligence and protect yourself and your investments today. 

What Is Investment Due Diligence? 

Due diligence is basically doing your homework before you make an investment to make sure you are protected against fraud or risky investments. So, how do you perform due diligence? Keep reading this due diligence guide to learn more.

Start With General Questions

First, start off with some broad general questions and narrow them down to specific questions about your investments. If these questions lead you to find that the investment risk is too high or has a poor return perhaps you should think twice about investing. 

If the investment appears too good to be true it usually is. If an investment boasts above-average returns check and see if a competitive advantage exists. If not it could be a sign. 

Understand the Company’s Business

Take a look at the information given about the investment. Is it complete? Is it understandable? Try explaining the company’s business model to a friend and talk through exactly how the company works. This will help you understand the company better and know if it will in fact be a good investment. 

Look at the ten warning signs of investment fraud and be sure the investment is a legitimate company before you invest. 

Think About the Risk

After understanding the company’s business model think about the risk. Every investment has some level of risk. Understanding the level of risk can help you understand if this is the best investment for you. 

If you do not see a risk associated with the investment, this can be a red flag. Marketing tactics that guarantee profits are designed to lure investors in quickly without giving them adequate time to do their due diligence analysis. 

Ask yourself how much money can you afford to lose. Think about the environment at the time that you make the investment. Brainstorm possibilities that could go wrong with the investment. 

Look at the Track Record

A sound investment will have a proven track record of success. Take a look at the company’s history and prior payouts to investors. 

Read about the company’s executives who lead the company and make the business decisions. Do they have the experience needed to lead the company to success? Review the company’s financial statements given to investors. 

This will verify if the company is financially sound and has the leadership it needs to succeed. 

Investment Due Diligence Is the First Step

Investment due diligence will help point out if an investment is too risky or a fraud. By doing your homework and asking questions you can learn more about the company and make the right decision on whether to invest or not. 

We are happy to help you with your quest for investment security. To learn more about how to get started investing with a self-directed IRA, schedule a 1-on-1 consultation with an IRA Specialist by clicking HERE.

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