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Welcome to our third edition of the Knomaze Business Review. In this issue we will cover the concept of Due Diligence as it pertains to investing in the stock markets. The articles presented here are merely our outlook on the markets and are not meant to be definitive financial advice.
For the business which is fortunate enough to have some long term excess cash lying around, the question arises on how best to invest the money. There are a number of alternatives such as GICs, mutual funds, term deposits, mortgages, stocks and commodities. Which one a business chooses is based upon a decision of how much risk the business is prepared to make, GICs having the smallest amount of risk while commodities have the largest. In all cases, a business must go through the process of Due Diligence.
Due Diligence is a process whereby an investment alternative is examined to determine if it meets a business's needs and whether the investment is sound.
Depending on the type of investment a business may want to investigate some or all of the following:
Investment MarketingFinancial ConditionTechnical AnalysisPolitical EnvironmentTrading EnvironmentKey PersonnelInvestment Contracts, Appraisals, InsuranceAny Litigation
Failure to do even the most basic analysis of an investment can lead to disaster. For example, after the break-up of the USSR, Russia issued several government bonds to cover massive shortfalls in government expenditure. Many businesses and institutions bought into these bonds on the assumption that a country as large as Russia would find some way to repay the bonds regardless of the political turmoil. Such is the nature of Government Bonds. It is taken as a matter of faith that they will be paid. Russia however defaulted on it's bonds to foreign investors. If investors had taken a closer look at the political and financial situation of Russia at the time, it would have been obvious that a default such as this was of serious potential.
The stock market is much more volatile than the bond market. In many cases, the cards are stacked against the small investor. Becoming comfortable in performing a reasonable due diligence will see results in increased profits.
- Kevin Feenan
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