Investing bears more than one similarity to gambling. Your money is at stake, risk factors are high, and the unknown – be it luck, fate or karma – looms large over the table. However, there’s definitely less chance and more knowledge of the market and customer psyche in how to become an investor than you might think.
Becoming an accredited investor does not happen overnight. Nor does calling yourself a successful and qualified investor. There’s no secret entrance to the world of investing. Rather, a bureaucratic process that sets the financial bar high and the limits of your patience even higher.
Below we’re going to outline the steps to take to achieve investing prowess. You will also get yourself familiarized with terms like ‘angel investor’, ‘SEC’, ‘equity crowdfunding’, and more.
How to Become an Investor – A Guide to Better and Safer Investing
What is an accredited investor?
First of all, who or what defines an accredited investor? The institution appointed with ruling who qualifies as a so-called accredited investor is the Securities and Exchange Commission (SEC).
Under their terms, only quite wealthy individuals can cross that financial threshold into securing the much sought-after status. For example, this is how SEC defines an accredited investor, word by word:
‘A natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person OR a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.’
The logic behind SEC’s restrictive, tight rules makes sense when you consider they’re limiting high-risk investments to individuals who can afford to take them. However, how do they fare in the startup landscape? Unless you want to bend the law by buying shares in a fast-growing, privately owned business NOT through the common legal arrangements, then brandish those investing skills and start pushing your annual income to $200k.
A Lesson on How to Become an Investor Is Hard-Won
However, there’s one more catch that you might have missed in the definition above. Even if you tick off that incredible amount of money that will get you in the fancy league of accredited investors, you’re not off the hook yet. You need to prove your successful bank account was not just a stroke of luck. Can you keep up the heavy duty money making for a sustained period of time?
The income test requires proof that you’ve crossed the $200K threshold consistently for the last three years. In addition, you have to ‘reasonably expects the same for the current year’, according to the SEC.
Or take the net-worth test, instead, and simply put $1 million on the table. However, don’t think that throwing in a property deed or two will count for much. It could have worked that time when you gambled your grandfather’s watch on a winning hand, but the Dodd-Frank Act states that a primary residence is not eligible as part of the net worth.
In the end, you are free to ‘gamble’ your money wisely, of course, on what we hope are going to be some bankruptcy proof investments. Either way, once you get into this exclusive club, there are many benefits awaiting.
You can pour your investments into venture capital, hedge funds, private equity, private placements, and equity crowdfunding offerings. The investment market may lack in affordability, but not in opportunities.
How to Become an Investor Without Losing Sight of your Investments
We’ve already defined what an accredited investor is, but have we answered the question on how to become an investor in the first place? If you’re reading our post, it’s likely you’re just beginning, and did not have time to season your skills in the heat of the market. So here are a few things to keep in mind once you’re on your way.
Investigate the Investment
Don’t throw yourself into a business proposition only on appearance. It may seem like eye-candy at first, but weigh the odds before you give your money away. Private companies are usually illiquid, risky affairs. Talk to the CEO, the team, other investors. Run the block and look for any potential loopholes or obstacles that may prove detrimental to the company you’re investing in.
Thinking Big Means Starting Small
You’re still a novice in the field of investment. Sure, you’re accredited and you have the money. But don’t squander them on the first opportunity. The trial and error principle works at a universal level, here included.
Invest a small amount of money in a first venture. While it may fail, it will lend itself as a lesson while not digging holes in your pocket.
Don’t Place All Your Money on a Single Bet
Once you’ve got the first hang of it, spread the money around. Don’t just pour it all in one investment. The Kaufmann Foundation released The Angel Investment Performance Project, where a study showed that it generally takes an angel investor nine years of trials and experience to learn the long ropes.
A diversification strategy will allow you to minimalize risk while tapping into different classes of investments. All in all, don’t put all your eggs in one basket. Which brings us to our next tip.
Understand Your Investment
We’re going to take your disposition towards adventure as a given. After all, you’re willing to put your hard-earned money at stake here. However, skip those business ventures you don’t understand. How else are you to keep track of your money if it disappears in terra incognita?
Warren Buffett, the ultimate business magnate and investor, sometimes dispenses some of his wisdom to beginners, but maybe the next quote you should save for other occasions: ‘Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.’
Start with the thimble and you’ll reach the bucket. More importantly, study on the investments you are backing. If they don’t engage either your knowledge or scope, look for something else.
Trust the Consumer
Customer data exists for a reason. This is a clear indicator on how a business is perceived by its target audience. And how to become an investor in a successful venture. Test social media reactions to the product you’re willing to bet your money on. Or personally converse to a handful of first-hand users to understand the pros and cons of the venture.
If possible, do a Net Promoter Score survey, which is a measurement framework for customer service. Ultimately, it indicates the growth and success of a product by asking the client one simple question: Would he/she recommend it to a friend or anyone close? Usually, answers are used to classify clients into three categories:
- Promoters are the loyal kind of customers who will stay with the brand while recommending it to others.
- Passives still purchase the product but are flimsy and may easily switch to a competitive brand.
- Detractors, well, it goes without saying they’re unhappy with the stuff they’re buying and are not shy about spreading the negative word.
What is Equity Crowdfunding?
You hear crowdfunding, and the mind instantly goes to Kickstarter and other donation-based platforms that offer creative projects a break into fame and success. However, equity crowdfunding, although similar in definition, is not Kickstarter. Where the former promises its accredited investors a financial slice of the pie, the latter only allows for non-monetary rewards as a form of payment.
However, there’s one similarity that may explain the confusing name ‘crowdfunding’. Equity or reward-based, both business models leverage the Internet to spread access to capital, thus offering start-ups a possibility to find an angel investor and thrive into a profitable venture.
In the end, investing prowess doesn’t come cheap or quick. By now, you’ve become acquainted with the legal requirements on how to become an investor. If you’re aiming at that SEC accreditation, it’s obvious you cannot start from scratch. It’s also encouraging. After all, if you’re already banking 200K a year, it means you know how to sweet talk money into going YOUR way.