Reading the Financial Pages For Dummies (UK Edition)
Reading the financial pages gives you an intriguing snapshot of how the City works. You can develop your skill in reading the financial pages to allow you to invest with confidence, whether you’re looking for a quick killing or to grow your wealth longer term. This Cheat Sheet gives you some tips on what to look out for in making canny investments.
14 Essential Things to Know about a Company Share
Reading the financial pages lets you stay ahead of the game when it comes to making decisions on you share portfolio. Before deciding whether or not to buy a share in a company, you need to know the following basic information:
The share’s TIDM: The identifier code used by the Stock Exchange (which used to be called its EPIC)
The share’s price: This will probably be expressed in pence (GBX) or pounds (GBP)
The company’s market capitalisation: This is the company’s current share price, multiplied by the number of shares currently in circulation
The share’s price/earnings ratio (if any): All things being equal, the higher the p/e is, the more optimistic the market’s expectations are. Make sure you know whether it’s a historical or a forward (predicted) figure. Trailing twelve months (TTM) is usually the most reliable measure if you can get it.
The company’s earnings per share: This is its pre-tax profit figure (ideally historical), divided by the number of shares in circulation.
The share’s dividend yield: Expressed as a percentage of its current share price.
The company’s dividend cover: That’s the company’s last dividend payment, divided into its pre-tax profits. A figure of 2 is good. Less than 1 may spell trouble.
The share’s ex-dividend date: Share prices will often drop as soon as the dividend is in the bag and people sell their shares, so don’t be deceived by the fall because it usually means nothing.
The company’s revenue: Also known sometimes as income, or just turnover. Rising or falling?
The company’s operating profit: Turnover from routine activities, minus operating costs.
The company’s EBITDA: Earnings before interest, tax, depreciation and amortisation. A crude measure of operating profit, which disregards the costs of paying debts and of owning depreciating assets. Popular among analysts, but not a formally accepted formula.
The company’s debts: Are they bigger than its assets?
The share’s price to book value (PTBV): This is the current share price divided by the net asset value (NAV) per share. Or, if you prefer, the market capitalisation of the company divided by its total net assets. It tells you how the company’s share price relates to the amount that might be got if it ever had to sell up.
The company’s free float: Expressed as a percentage figure. This is a rough measure of how many of a company’s shares are available on the free market - as distinct from being held by ‘tied’ investors who are unlikely ever to sell. Can be critical in determining how big a weighting the company gets in a stock market index.
Trading Shares – Who Does What?
After reading the financial pages thoroughly, you’re ready to get started on the business of buying shares. Now you need to know which professionals to use, and what for. This is what they do:
The broker obtains the shares on your instructions, and may also hold them for you.
The market maker is the ultimate buyer and seller, who sells you the shares you buy and buys the shares you sell. Since the Big Bang deregulation of 1986 he is likely to be a broker in his own right.
The nominee account manager holds your shares on your behalf if you are running your portfolio through a third party - as would be normal if you were
The house broker (small companies) Companies under a certain size may have only one broker trading their shares and acting as market maker. Share prices may therefore be less robustly competitive than in a situation where multiple brokers are competing for the business.
8 Important Things to Know about a Trust
Reading the financial pages, you’ll come across lots of mentions of trusts. Trusts are investment vehicles managed by city professionals. You give them your money, they add it to a pot with lots of other peoples’, and buy the shares for you. The essential bits of info you need about a trust are:
Its Net Asset Value. This is the underlying value of the trust, calculated by deducting all its liabilities, including loan capital and preference shares, from its total assets. NAV is usually expressed in terms of NAV per share. Can also be applied to listed companies.
Its discount to NAV. This is the amount by which the market capitalisation of the trust undershoots the NAV. Discounts to NAV are normal, because the stock market needs to allow for the costs that would be incurred during any asset disposal (for example, if the company were being wound up).
Its premium to NAV: Calculated in the same way. Many investors will avoid an investment trust on principle if it carries a premium, believing it to be dangerously overheated.
Its initial fees: For unit trusts only. How much it charges you to invest at the ouset.
Its annual management fees: For unit trusts only. What it charges you annually to control your investment.
Its bid/offer spread: The difference between the price you’d pay for buying into the trust and the price for selling your stake.
Its dividend distribution dates: When it pays out.
Its performance over 1 year, 3 years and 5 years, measured against both its sector and the market at large.
Ways to Keep Yourself Disciplined as an Investor
When investing, you need to maintain some order in what you do. Reading the financial pages helps you get the info you need, and helps you learn what you need to do to keep disciplined. Key things to do are:
Maintain a stop-loss regime, whereby you decide to sell a share automatically if it falls by a certain amount. And stick to your policy through thick and thin. Tough, but it means your fragile pride doesn’t get hurt because it’s the stop-loss that’s ‘doing the selling’, not you.
Run a dummy portfolio for a while before investing real cash in a share, and spend time watching and learning about how it behaves.
Keep your portfolio allocation under constant review, and make sure it fits your risk profile. Too much property, too many high-risk shares, too little cash?
Consider top-slicing after making a particularly big profit. Sell some of your holding, so as to stop your portfolio becoming over-dependent on one share.
Don’t over-trade: Buying in and out of a share to earn a few percent is expensive in terms of fees, and is rarely worthwhile in the long run. If you like the share, stay invested.
Never fall in love with a share: It won’t love you back.