Cheat Sheet

Investing in Shares For Dummies

Considering share investing? There are some fundamental aspects you need to be aware of before jumping in as a share investor in the UK. Avoid potential catastrophes and make the right investment choices by thinking ahead – take a look at the following points and tips.

The Ten Most Important Points about Share Investing

When you decide to invest in shares, making the right decisions is crucial: The ten most important points you need to know about share investing are listed below.

  1. You’re not buying shares; you’re buying a company.

  2. The only reason you buy a share is because the company is making a profit.

  3. If you buy a share when the company isn’t making a profit, then you’re not investing; you’re speculating.

  4. A share, or shares in general, should never be 100 per cent of your assets.

  5. In some cases, such as a severe bear market, shares aren’t a good investment at all.

  6. A share’s price is dependent on the company, which in turn is dependent on its environment, which includes its customer base, its industry, the general economy, and politics.

  7. Your common sense and logic can be just as important in choosing a good share as the advice of any investment expert.

  8. Always have well-reasoned answers to questions such as ‘Why are you investing in shares?’ and ‘Why are you investing in a particular share?’

  9. If you have no idea about the prospects of a company, and sometimes even if you think you do, always use stop-loss orders.

  10. Even if your philosophy is ‘buy and hold for the long term’, continue to monitor your shares and consider selling them if they’re not appreciating or if general economic conditions have changed.

Reading List for Investors in the UK

Doing your research and knowing your subject before investing in shares is crucial. Here’s the literature that should be on your bedside table when investing in shares.

  • The company’s annual report

  • Standard & Poor’s Share Guide

  • The Financial Times

Looking at Four Important Parts of a Company’s Fundamentals

Knowing what aspects of a company to look at is crucial before you invest in shares. Cut through the jargon – this is what you should have in mind when inspecting a company’s performance.

  • Earnings: This number should be at least 10 per cent higher than the year before.

  • Sales: This number should be higher than the year before.

  • Debt: This number should be lower than or about the same as the year before. It should also be lower than the company’s assets.

  • Equity: This number should be higher than the year before.

Knowing the Best Financial Measures before Investing

When investing in shares, you need to know how a company is doing. Certain financial measures can help you more than others when analysing a company’s performance. Here are five of the best:

  • Price-to-Earnings ratio – PE: For large-cap shares, the ratio should be under 20. For all shares – including growth, small cap, and speculative issues – it shouldn’t exceed 40.

  • Price to sales ratio – PSR: The PSR should be as close to 1 as possible.

  • Return on equity – ROE: ROE should be going up by at least 10 per cent per year.

  • Earnings growth: Earnings should be at least 10 per cent higher than the year before. This rate should be maintained over several years.

  • Debt-to-asset ratio: Debt should be half or less compared to assets.

Nine Events That Could Spell Trouble for Your Share

Economic, fiscal and political changes can sometimes jeopardise your investment in shares. The following list of events should set alarm bells ringing, so stay alert and be attuned to

  • A bear market

  • Heavy insider selling

  • An inquiry or investigation by the government

  • Excessive government taxation

  • Acts of nature, such as a hurricane or tsunami

  • Pending government intervention; for example, nationalising an industry

  • An economic slowdown or decline in the industry or sector

  • National or international conflict, such as war or acts of terrorism

  • Excessive government regulation

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