Beware low volume, high volatility stocks such as Groupon and LinkedIn

If you trade stocks on your own, beware low volume, high volatility stocks such as Groupon and LinkedIn. Large institutions can buy these stocks up in large volume, drastically increasing the share price due to the low volume of available shares. Then individual investors see the price increase and they want in on the action, so they buy, and oftentimes they are buying from the market-maker that created the price increase. When the price tops out, the market-maker has sold out at a huge profit and nobody is left to buy up the shares at the inflated price; and then you have freefall.

Three Things Every Entrepreneur Should Know before Starting a Business
Sometimes, entrepreneurs come up with a ‘game-changing’ business idea that will revolutionize the current industry.  Other times, they are trying to improve on a current idea, by adding their own expertise.  One characteristic that seems to overlap many start-ups is that the focus is on the idea or the product, with less emphasis on the financial minutia of creating and running a business.   The following are three things that every entrepreneur should know before they even register their business with the local agencies:

1.       What are they REALLY good at?
This is a vague question because it covers various points that are all important.
–          From the business level: What differentiates them from current providers?  Why will people buy from them instead of their competitors?  Anyone with the idea that they will not have any competitors should
–          On the personal level: What will be THEIR role in their company?  Not every great salesperson makes for a great sales manager.  The ability to balance a checkbook does not necessarily make for perfect bookkeeping or create CFO skills.  Besides, if they are great at sales, they shouldn’t be doing bookkeeping, because they should be focusing on increasing revenue.  Someone who thinks they can do it all risks becoming a jack of all trades and master of none.

2.       What is their financial strength?
Again, this opaque question encompasses multiple aspects that need to be considered:
–          Does the entrepreneur have the personal liquidity to sustain him/herself in the beginning when the business isn’t earning money?  For how long? Company failures often arise from overly optimistic projections that end up in financial ruin.  A common bit of advice given is, “estimate the worst-case scenario and double it.”  If a person starting a business also has to worry about paying their rent or mortgage and buying groceries, they will be distracted from growing sales and product development.
–          What is the company’s funding potential?  Is the entrepreneur going to raise money from selling assets? from friends and family? from a bank or other lender?  What are the assets of the company that a lender would consider?  One of the best rules of business is so good that Danny DeVito starred in a movie with the ‘rule’ as the title: Other People’s money.  It is best to use invested and borrowed money than to lose your own personal assets.  Many people do not want to give up equity or pay interest because they feel they will lose out on future profit, but since most businesses fail, and all businesses require more money than ever expected, borrowing or taking on investors increase a company’s liquidity, while decreasing the owner’s potential personal loss.  Another saying in business: “It’s better to have a small piece of a large pie, rather than have an entire tiny pie.”

3.       What is the Timing for the business?

As you guessed, this question also has multiple facets.  The entrepreneur must accurately plan the timing for both the entrance and exit of the business even before the first day of operations.

With regards to starting the business, the entrepreneur must objectively decide: Is this the best time to enter the market?  A person starting a business just because they were laid off from their job might not be the best reason.  Also, is the economy right for a start-up of this type?  For example, consumer products companies generally do not do well in a recession.

An entrepreneur needs to gauge perceived demand for their product or service, and ideally have customers, pricing and sales volume projected out, using real demand metrics, rather than the ‘Chinese Rule’ (“if just 10% of the people in China bought this product we would become millionaires”).

Lastly, what is the timing for the inevitable exit from the business?  When will the entrepreneur know they have succeeded or failed?  What measurement will they use to track this level of success or failure?  Will it be at a certain threshold of revenue or income? or debt?  Nobody likes to fail, but it is essential to recognize failure early and adapt, rather than lose all personal assets and declare bankruptcy due to stubbornness.

As you see from this article, I have not provided any answers regarding what is right or wrong or factual knowledge you need to learn before starting a business.  I have merely provided you with questions you should be able to answer while you are planning your business.  If you know these three things, then you will know the essentials for starting your business.  Best of luck to you!

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