It can be challenging to discern whether an investment will be good or not. That being said, there are warning signs to signal if an investment is truly bad.
Here are some of the most significant warning signs that a potential investment is one you should shy away from.
You might be pushed into an investment by being told that you’ll miss out on a golden opportunity if you don’t “Act Fast!”. These investments strike up flashes of used car advertisements and TV shopping shows.
Solid investments are based on fundamentals that, for the most part, don’t change overnight. In other words, if an investment is good today, it’s likely to be good for a little while.
Investments that require you to act fast before it’s too late are often signs of either a scam or a bubble about to burst.
You can often find great value investments by purchasing when the price is low and then reaping the rewards when it increases in price again. For example, in the stock market, if you time an investment right, you might be able to purchase a solid stock at a value price.
But, when a stock drops in price rapidly, it’s usually a red flag that it’s a bad investment — at least for a little while. Stocks that experience sharp price declines usually remain at those suppressed levels for a while. So, heed this warning sign and let the dust settle before jumping headfirst into the deep end.
Someone Else Touts It
Just because someone else is making an investment doesn’t mean it’ll be a good investment for you. That’s why you should never base your investing decisions on what someone else says — no matter how reputable they are as an investor.
This isn’t to say that all investments that someone else touts are bad investments. Rather, it’s a warning that just because an investment is good for someone else doesn’t mean it’s necessarily good for you.
Different people have different needs, goals, and risk tolerances when it comes to investments. So, you can take someone else’s investing tips, but don’t base your purchasing decisions solely on them.
Actual Performance Doesn’t Match Stock Performance
There are times when a company’s stock could be soaring even though the company’s financial fundamentals don’t match up. A prime example of this became mainstream during the pandemic, with so-called “meme stocks” such as GameStop.
A group of investors on an online forum collectively decided to invest heavily in GameStop as a way to “stick it” to short sellers and institutional investors. What resulted was a huge spike in the company’s stock price, even though the company was failing by all reasonable measures.
This situation occurs relatively often when a company’s actual performance doesn’t match up with the performance of its stock — though usually not as public as the GameStop example.
As Adam Ferrari, the CEO of Ferrari Energy, explains, if you see a company’s stock rising in price without the financials to back it up, something fishy might be going on. Scenarios like these always require a deeper dive into what’s going on.
If you can’t answer why a company’s stock price is increasing, then it might be good to simply stay away — even if it means missing out on an opportunity. More times than not, it’ll pay off in the form of money you didn’t lose.