One of the best aspects of investing your own money is the freedom you have to adopt any sort of investment philosophy that works for you. Everyone wants to make money on their investments, but beyond that premise is a wide open field. The reasons why you might choose to invest in a company reflect your personal goals and objectives and can range from a decision based on a minute analysis of a company's valuation to simply liking how a company does business.
Return on Investment
Perhaps the most popular reason why people invest in companies is to earn a return on their investments, also known as profit. Investments made through the purchase of stocks and bonds or by extending a loan are expected to provide the owner passive investment income and capital appreciation at a rate that exceeds the rate the owner would earn through safer or more traditional ways of putting his money to work, such as by keeping money in a savings account or buying a piece of real estate.
Investing in a company by buying shares of common voting stock gives you an ownership interest in the company and a right to influence its affairs. Individuals and other entities can make a strategic decision to purchase available shares of stock of a public corporation that will give the investor the right to vote at shareholders meeting and potentially affect management decisions and appointments to the board of directors.
Belief in Management
Often, people will choose to invest in a company because they have confidence in the business acumen or passion of the management team. This reason can support investment decisions by relatives who choose to invest in a family member's new business idea, to angel investors who make an investment decision based on an entrepreneur's credentials and passion for a project, to major investors who may look at the track record of a management team that has experienced past business success.
Investors are typically advised to diversify their investments, so their money is dispersed to different types of investment vehicles to reduce the risk that a downturn in any one industry will inordinately impact the value of an investor's portfolio. One of the reasons why people invest in the stock market generally and a particular company specifically is to properly diversify their investment portfolio by type of investment and type of industry. For example, a diversified investor might invest in real estate and the stock market and choose to buy stock in both IBM and Walmart.
Strategically, investors choose companies to invest in by analyzing a company's financial, managerial, operational and market position to identify a stock that has been undervalued. Buying stock that you feel is undervalued is a gamble on the likelihood that the market will eventually recognize the company's true value and the stock price will go up, resulting in a profit for everyone who purchased stock in the company while the shares were selling at a bargain.
A functional reason to invest in a company is because it pays a dividend. A dividend is a periodic distribution of profits to shareholders. Companies that pay regular dividends provide a passive income stream to investors. A company that achieves positive earnings growth per share and regularly distributes a dividend is often considered a safer, more stable investment than investments in companies that do not pay a dividend.
Occasionally, an investment in a company is justified by future expectations of the company's evolving competitive advantages. A company might be expected to gain an advantage over competitors through the development of a new product, control of crucial intellectual property or by cornering the market in a critical industry resource.
People sometimes choose to invest in a particular company because of the way the company does business. This can involve an assessment of the corporation's culture, the work it does in the community, its labor practices or its commitment to green solutions among other things.
Terry Masters has been writing for law firms, corporations and nonprofit organizations since 1995. Her online articles specialize in legal, business and finance topics. She holds a Juris Doctor and a Bachelor of Science in business administration with a minor in finance.