Six Ways to Reinvest Company Earnings in the Stock Market

For some, it's a ludicrous idea betting your company's earnings in the whims of the stock market. There are no assurances that you'll make any money from it, and worse, it could lead to partial or total loss of your investment. But to reinvest company earnings into the stock market isn't a totally insane proposition nor is it impossible if done right. Here are six investment tips that can grow your earnings:

Establish Ground Rules

Set a stop loss and a profit target when you reinvest company earnings. The levels you set will depend on your timeline and risk profile. Since you may need to pull out your investments during months when sales numbers are low, a buy-and-hold strategy may not be the best fit. Meanwhile, a more hands-on strategy, such as scalping or day trading, requires full-time attention on price charts, which can become a distraction from running the day-to-day operations of your business.

Consider Growth Stocks

Growth investing involves buying and holding stocks that perform well during the mature phases of an economic cycle wherein growth is consistently high. This form of investing mirrors what companies and consumers are all doing collectively during healthy economies, which is to set higher expectations and targets for future economic growth and to consume more since they expect to get more bonuses and raises. Technology companies are a good example of growth stocks as they tend to have high valuations, yet if the conditions are right, they can continue to grow much higher.

Use Technical Analysis

Technical analysis uses hard numbers to try and gauge the value of a stock and its future direction. Data, such as 52-week highs and lows and moving averages, are often the focal point of technical analysts and investors who choose this approach. There are other indicators you can use to analyze the markets more precisely, such as Stochastics Oscillator and Bollinger Bands.

Protect Your Existing Investments

Hedging is an old practice used to limit investment risk. When hedging your company earnings investment, you normally take an opposite contract or position, such as a futures contract, to offset any losses from adverse moves in the market. A collar strategy is another technique for effectively lowering risk when buying into stocks or any other financial instrument for that matter. This involves holding stock of an underlying company while concurrently purchasing protective put contracts and dumping call contracts against that position.

Use Fundamental Analysis

As a business owner, you're probably all too familiar with fundamental data that encompasses a company. From price-to-earning ratios to outstanding debt, fundamental data paints a clear picture of the underlying company's health. Go with companies that are profitable, have a good earnings history and promising outlook, and occupies a fairly large portion of the market.

Keep Things Simple

Adhere to the KISS principle, which stands for "keep it simple, stupid". Reinvest your company's earnings on companies that you know and whose products/services you use. As a business owner, you probably work with vendors and suppliers or research competitors in the market. This unique position gives you the advantage of handpicking brands that you are already familiar with. If you are not able to explain what a company does in under a minute, then you should probably not be investing in it.

The Bottomline

Why shouldn't companies reinvest their earnings to the stock market or any other financial market for that matter? Given the right selection process and a keen eye for hand picking the right companies, you can start making good ROI, which can then be reinvested into your company to scale operations which then lead to higher earnings that can be reinvested. Ultimately, this cycle should provide a better financial cushion for your business' rainy days and lead to faster and more sustainable growth.