The Art and Science of Business Investing

Investing in shares of operating companies, those firms that create and/or market products or services, can be an ingenious avenue to leverage off of all kinds of other investments. You can also buy shares in an investment company, which is a firm that invests its money in the shares and bonds. The original funds are raised issuing shares to the public. Profit to the investment company comes only from the interest, dividends, and capital gains on its investments.

The closed-end company is similar to an operating company. It has a number of authorized shares that it can issue. Additional sources of funds come from retained earnings, bond issues, or by issuing more shares to the public. The shares of a listed closed-end investment company are traded just as are shares of operating companies: on a stock exchange.

Open-end companies, more commonly referred to as mutual funds, can buy and sell their shares directly with you or through brokers. There is no trading market. There are load funds, that is, those that charge a selling fee and no loads. The prices of their shares depend on the market value of the securities held by the fund. For example, if the value of the fund’s securities is $15 million and there are three million outstanding shares, then the price you pay is $5 a share. Insurance companies offer variable annuities that have characteristics similar to mutual funds.

Investment companies range from the popular money-market mutual funds to specialized option funds. An investment company affords you two obvious advantages. No special time or skill is required to manage your investments. A professional management team handles almost everything. Equally important, the investment company offers you diversification.

While an individual with a small amount of money will not be able to invest in a variety of areas, the company can and will do this. The management group of an investment company operates to achieve broad objectives. Some will stress growth; others, income. Therefore, it is easy for you to match your investment objectives with those of the investment company.

Taking a Ownership Position in a Small Business

Perhaps you have an ownership position in a small business in several ways. (1) The business may be owned outright as a sole proprietorship. (2) Two or more people may each own a portion as partners. (3) The business may be incorporated, with the stock held by one or more people.

In case of a general partnership or sole proprietorship, be forewarned that should the business go bankrupt, the owners and general partners are personally liable for the unpaid debts of the business. For this reason, incorporation may be advisable. On the other hand, there are legal fees, reporting requirements, and tax differences for an incorporated business. Moreover, the desirability of incorporation will vary according to the type of company and the goals and risks the investors wish to assume.

An “S” corporation may provide a solution in that it has the limited liability advantage of a regular corporation, while its income (or loss) is passed through to its shareholders, hence avoiding the corporate-level federal tax. Not all states recognize “S” corporations, and federal tax rules governing them are complex.

If your investment in part or complex ownership of a company obligates you to manage the business, then your expected return (salary and/or share of profit) should reflect this time investment. Because of the numerous obstacles that must be overcome to successfully start and run a business, the risk to your investment is very high and that investment will require high maintenance. Do not consider buying into a business until you have educated yourself thoroughly about the business and the business world.

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