Personal Finance

Thinking of Buying Stocks in a Startup? Consider the Risks First

Buying stocks in a new startup, be it privately or on the public market, can be an exciting prospect at first thought.

The fairly new company may be breaking in an exciting new product or service into their target market or they may be doing something well-established but with an ethos that resonates with your values – either way, you’re very interested.

If you have the capital at hand and you think you’ve found a real winner worth investing in, you should most definitely consider supporting them by owning a piece of the company.

Like any investment though, there are risks; more so with startups due to the fact that most new businesses fail within the first year. By knowing the risks involved, however, you can buy stocks wisely and reduce the likelihood of losing your cash.

#1 – Invest Early & at an Optimum Time

Growth is the main objective for a startup, which means the company’s value will increase at its fastest rates during these early infant years. This is the key reason why identifying a future successful company and buying up stocks earlier while they are cheaper is the best way to maximise your gains.

In essence, this is simply the core of why people buy stocks in any company, new or old.

When we talk about the ‘optimum time’ for investing in startups, it depends heavily on a range of different factors – how competitive the specific industry is, whether the new business’s product or service is well-received, and many other internal and external elements.

You will have to have to play it by ear, for the most part, to know when the best time to buy stocks is; however, there are some general guidelines of when to invest that some support, some of these are:

  • As soon as the company first begins selling stocks.
  • When the startup first releases their products or begins providing their services.
  • After a positive event or news goes public.
  • After a positive event or news goes public in the wider industry.

#2 – Finance-Related Pitfalls

It’s not just the startup itself you have to consider when your money hangs in the balance; it’s also all about making the right personal finance decisions as well. Knowing about the right accounts to use for investing in company stocks as well as understanding tax forms can be lifesavers.

#3 – Open a Stocks & Investments Account

Certain types of stocks and investments accounts are typically used for buying stocks in businesses – this is because they generally save you from haemorrhaging more money to tax. Look anywhere across the web and you will find that these accounts are the standard for investing in everything from startups to mutual index funds.

You can set these accounts up from a range of different vendor; Vanguard is a very popular one for those in the USA. It is worth taking a look just to see what kinds of features these accounts offer those looking to buy shares in startups.

#4 – Consider Submitting a 83b Election Tax Form

If you’re serious about making a mint from investing in startups, you should know about the advantages of submitting an 83b election tax form. While it’s not always the best option for everyone, some argue that 99% of those buying stocks in startups should submit one to the IRS.

Put simply, this form will allow you to pay less overall tax if your stock happens to rocket in value in a short period of time. So, for example, if you buy one stock for $20 and the value of that stock somehow rockets to $500, you may be able to dodge the tax increase this may usually bring.

Being a good investor is as much about gaming the market as it is gaming the federal tax system.

You can find this form in all corners of the internet because it is standardised. However, if you really don’t know what the form is supposed to look like, play it safe and go with a known supplier like Founders Workbench.

#5 – Find a Valuable Startup to Invest In

It’s not easy picking real winners among the many new startups popping up all over the globe, especially in competitive fields like technology, however, if this was the case, everyone would be making a lot of easy money.

Good luck in your search for your next groundbreaking new company to buy high-performing stocks in.

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