Being an entrepreneur means you’re blazing your own trail. A big pro is that you have no one but yourself to answer to. A con — you are in the driver’s seat when it comes to your business, leaving you with big decisions. But, this can also be a perk of being a small business owner, as long as you are educated and have proper guidance.
To be a successful business owner, it is imperative that you learn how to invest so that your business is more profitable and competitive.
If you’re looking to learn how to maximize your return on investment, this article covers the most common investments for small businesses.
1. Stock Market
The most important thing to remember about investing in the stock market is that it is high risk and is a long-term investment opportunity. However, this is one of the most common investment types for small businesses. A company divides the business property into shares which are sold for profit. When someone buys a share of a company, they are investing in a small part of the company and shares in the profits and assets.
The stock market is a risk because it is contingent upon the success of the company in which someone is invested. If the activity of the company goes up, shareholders share in that success. But if it goes down, shareholders feel that as well. And if the company goes bankrupt, an investor loses their entire investment.
The stock market is considered a long-term investment plan for the very reason of the volatility of the market. A company’s profitability cycles through waves and valleys and it’s near impossible to time the market, which is why investing in the stock market is a long game.
2. Managed Funds
Funds are reserves of capital that are established for a specific purpose and are often managed and invested by professionals. A business owner can also invest in funds to obtain a return. Funds have the advantage of giving the investor access to a large number of investments through a single transaction.
There are three main types of managed funds:
- Mutual funds: a way of investing money alongside other investors to collectively purchase securities while each investor retains ownership and control of his or her own shares.
- Index funds: investments comprised of stocks that mirror the companies and performance of a market index, such as the S&P 500.
- Exchange-Traded Funds (ETF): a fund that can be traded on an exchange like a stock, meaning it can be bought and sold throughout the day. ETFs often have lower fees than other types of funds. Depending on the type, ETFs have varying levels of risk.
A bond is a fixed-income kind of investment. It consists of a loan you make to the issuer of that bond (such as a company or the government) in exchange for regular payments in the form of interest. The invested capital is based on the expiration date of the bond.
Bonds are considered lower risk than stock, but also a smaller return on your investment.
4. Retirement Accounts
A traditional 401(k) plan is a retirement account offered by employers to their workers, which has tax advantages and contributions. Offering 401(k) plans to employees is an important benefit expected of employers. Additionally, a company can choose to match an employee’s contribution up to a certain percentage.
Another type of retirement account is an IRA or individual retirement account. Two main types of IRAs are traditional IRA and Roth IRA. Roth IRAs let you contribute after-tax dollars and take tax-free distributions in retirement, while traditional IRAs allow you to contribute pretax dollars, but you’ll pay tax on the distributions.
You can learn more about retirement accounts for small business owners in this blog article.
5. Certificates of Deposit and Savings Accounts
These banking products are considered safer investments and guarantee a return. Both are issued by banks or credit unions but have parameters. Certificates of deposit, or CDs, offer the investor interest on their investment as long as they don’t withdraw funds within a certain amount of time. There are penalties for withdrawing money before the end of the term, so putting money into a CD should be left alone.
There are high-interest savings accounts available and are a good option to save for emergencies or prepare to make a large purchase. Similar to a CD, funds in a savings account should remain untouched unless it is needed.
Owning a small business and make those daily and overarching decisions can be a lot. But investing should be a priority to help you plan for the future and scale your business. We specialize in helping small business leaders make those financial decisions that will have the greatest impact on the company and themselves. Give us a call today to set up an appointment to learn how we can help you invest in your business.