How do I Know if I Am Making a Sound Investment?

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  • Written By: Carol Francois
  • Edited By: Bronwyn Harris
  • Last Modified Date: 29 January 2020
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A sound investment must meet three basic criteria: it must be legitimate, provide a reasonable rate of return, and have a relatively low risk. The purpose of an investment is to increase the money available to the investor. At the bare minimum, the original capital invested must be retrievable.

Investments in illegal actives are not a sound investment. The risk with this type of investment is tremendous and there are no avenues of recourse should the recipient steal the funds. This type of investment typically offers a higher rate of return than a standard investment, but it is important to weigh the risks before making a decision.

A reasonable rate of return may vary, but the government interest rate is a good indicator or benchmark. These investment vehicles are guaranteed, and so offer a lower rate of return. Over time, all other investments should meet or exceed this rate.

The rate of return is proportional to the amount of risk. Question any investment firm that is able to offer a higher rate of return on low-risk investments. This is the ideal combination for the novice investor and as such is a very common tactic for fraud artists. There is no such thing as a low-risk, high-yield investment.


A sound investment contains at least three components of a stable business plan: sustainability, sound business practices, and an existing customer base. These factors are easy to identify in the business abstracts or reports on any stock or investment opportunity. Make sound investment decisions by validating the facts and ensuring that the business plan is practical and logical.

Many people are deterred from following their instincts and instead invest with firms that have enticing advertising campaigns, clever slogans or a lot of discussion in the media. It is very important to remember that all businesses exist to serve their customer. Inspect the product or service to determine if there is any value for a customer. Look for quality, good design elements, and an existing, unmet need.

A sound investment should meet your personal ethics as well. Investments in firms that use child labor or questionable business practices are not wise. The funds invested in a company should align with your own ethics, as your money is an indication of support for their known behavior.

Aside from the ethical issues, these items are subject to government regulations, penalties, and lawsuits. If the business is profitable due to lower labor costs, as soon as they are required to use legal labor, their costs will increase. Questionable business practices increases the companies risk of legitimate lawsuits, which will cause a decrease in stock value and loss of profits.



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