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What are the risks of investing in businesses you don't know about?

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Syed’s Answer

Hi Isaac,

When you invest in unfamiliar businesses, you have greater downside risk (chances of losing money) because you're not as familiar with the quirks of the business that impact the stock price:
1. Seasonality of sales
2. Customer concentration
3. Macroeconomic exposure (i.e. impact of changing interest rates, oil price, etc. on the demand for the company's products and services)
4. Competitive landscape (how do they rank within the market in terms of revenue, profits, etc.)
5. Quality of the executive team (do they have long-term vision? Do they have a good track record? Do they have ethical concerns that could tank the stock?)

Try to do your research before you put your money down on the line for something. Don't invest your rent money, your student loan payment money, future child care money, or any other money you need to pay for other essential expenses. Only invest what you can afford to lose!
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Ian (Carl)’s Answer

Without performing your own due diligence, you could end up losing all of the money you invested. Before you invest in a security or any other investment vehicles, you should perform adequate research or outsource your investment management to a professional.

Thank you comment icon Agree completely with Ian above as if you do not do your own due diligence you cannot understand what your money is being used for and are gambling and could lose everything. Make sure you perform adequate research thru multiple sources that also get good reviews. Otherwise pay a trained professional after you have researched that they have good reviews and are a trusted professional. Brian Downey
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Rebecca’s Answer

The major risk is you don't know the business. To make any investment, it is required to do the 'homework' first. Eching Carl's reply, you need to the due diligence on the business to understand how the entire industry works, e.g. business model, number of players in the markets, entry barriers, etc. You can then furhter evaluate whether you wanna to invest in that industry and decide the next steps.
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Bryan’s Answer

Agree with Carl's answer. Always do your homework (look at their financials, talk to people about the company for example) before investing in a business. If you don't, you are at risk of losing your money that you invested.
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Moriscia’s Answer

Investing in a business even when you know the industry still hold risk. The key is to do your research on the company, the industry and the market. Look up their financial standing and reputation. Research their competitors, influences in the market that could be a treat to the business or an opportunity. Invest cautiously if after the research you are still unsure. While nothing is a guarantee, knowledge will help with making an informed decision.

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