There are a great many factors to consider in any investment. These factors are almost always present in one form or another in virtually every market. And lets be clear, there is a market for everything – somewhere…
The stock market might be the most obvious place to think of as a market – hundreds of thousands of buyers and sellers every day, billions in assets changing hands – but every asset and asset class will have a market of some sort. That market may not be as organised as a stock exchange – few places are – but it will exist.
If you choose to buy and sell art, then your market is brought together by auction houses. If you choose to buy and sell stamps, then your market might be auction houses as well, but it might also be eBay and specialised online locations as well. If you are in the residential property market, then real estate agents create your market.
Where is your market located? Does this jurisdiction recognise property rights? This is the most fundamental question of all for an investor. Will an outside body take my asset from me? If they do, can I challenge the seizure in the courts? To what extent are the rights of an investor protected legally? This may sound trite, but there are many parts of the world where corruption is rife, even (especially?) in government.
The nature of the marketplace is very important because it has an influence on the liquidity of your asset. Liquidity of the market is a term used for ease of sale. How quickly and easily can your asset be turned back into cash? Are there buyers waiting eagerly for it, or not? What price will these buyers be willing to pay?
Related to liquidity is transparency. A stock exchange is a regulated environment to buy and sell assets. This – in part – means that the prices at which stocks and shares trade for is known. It might not be known by you, but it is available publicly somewhere, if you know where to look.
However, artworks of historic importance may be unique. Perhaps a similar example has not been sold for years, or decades. What guide price can be applied to judge a fair value? Therefore, information about your market is important.
How is a market value decided? What is a fair price to pay? Are you paying too much or not enough? Clearly, this is important for any investor, beginner or experienced.
How much risk is being taken? Are the potential risks fully understood?
What is the tax status of an investment? Will any profits be taxed? At what rate?
What transaction fees will need to be paid to buy or sell the asset? What impact will they have on the overall return on an investment?
These questions – and more – will be answered on the following pages of our beginners guide to investing: