Moneyextra.com
- Our Online Buys
- Get a Loan
- Get a Credit Card
- Get a Mortgage
- Cheap Car Insurance
- About Us
- Contact Us
- My Portfolio
-
Money News
- Finance Features
- News Feeds
- Guides
- Dictionary
Buying Shares: 8 top investing tips on buying shares
Additional Services
- Company Reports - get free company reports here!
- Stocks & Shares ISAs - look for the best ISA online
- Insurance - need home, travel or car insurance?
Read the headline again. It says 'top tips on buying shares' NOT 'top tips on which shares to buy'. What you'll learn here are some basic ground rules for you to follow to allow you to make your own investing decisions, not hot tips on which shares are going to double (or halve) in value in the next few days. It's not that easy!
- Top Tip #1 Know the kind of investment you want to make
- Top Tip #2 Understand the risk you are taking with your money
- Top Tip #3 Understand how the company makes its profits
- Top Tip #4 Watch the management - do you trust them?
- Top Tip #5 Watch the numbers!
- Top Tip #6 Beware of trying to 'time' the market
- Top Tip #7 Don't put all your eggs in one basket
- Top Tip #8 Know how your share price can be affected
Top Tip #1 Know the kind of investment you want to make
Are you looking for capital growth - do you want shares whose price is going go up strongly? Or are you looking to create an income through shares which pay high dividends? So what's it to be - growth or income?
Income - if you want to measure the income offered by a share you need to work out the yield and then compare the yield of the share you're thinking of investing in with others. Yield is simply the price of the share divided by the annual dividend payment.
Growth - a variety of factors may cause shares to grow strongly in value, among them: the company may be a takeover target (beware, the price could go down as quickly as it rose if the takeover fails to materialise); new technologies, new products, new services, new markets could all provide excitement in the share price (but technology can go wrong, be delayed and expansion into new markets can be costly).
Want to track your investments? Moneyextra's free portfolio service has all the tools you need.
Top Tip #2 Understand the risk you are taking with your money
There is no such thing as a sure-fire winner. Share prices, their values and the income from them can go down as well as up and investors may get back less than their original investment. Past performance is not a guide to future performance.
Read that paragraph again. The risk warnings about investing and share trading are there for a reason. And it's not just to protect brokers from disgruntled customers. There's an old joke which suggests a stockbroker is a man who takes your money and invests it until it is all gone!
Why invest in shares at all if the risks are that great? Share investing is simply part of the spectrum of savings and investing and the same adage applies - the more attractive the potential rate of return on offer the bigger the risk to the capital that you invest.
Before buying shares you need to decide what level of risk you are prepared to take. Are you looking for shares that that don't carry too much risk, or are you prepared to accept higher risks in return for the prospect of higher returns?
In the very broadest terms, a cautious investor might consider investing in blue chip shares while a more aggressive investor may look where a greater risk of loss carries the potential for greater rewards, for example among companies on the Alternative Investment Market .
Want to keep track of how the stock market is performing? See top shares at a glance.
Top Tip #3 Understand how the company makes its profits
What does the company do? Companies whose shares are quoted on the stock market are divided into a variety of sectors (e.g. banks, food & drug retailers, utilities, etc.). But knowing which sector a company's shares are in is not enough. You need to understand how the sector is performing and how the company makes its profits.
For example, is the sector performing well in general? What challenges do companies in the sector face? Is your potential investment facing strong competition? If you're thinking of investing in a retailer, how is business on the high street, how busy are the company's shops (why not visit a local branch)?
The more you understand how the company operates the better informed you'll be and you'll be able to make sound investing decisions about whether shares are a good home for your money or not.
Find the share price you are looking for.
When you invest in shares you buy a piece of the business. You literally become a part-owner. So it's important, as an owner, to know who is managing your business. It's your money that you are trusting them with!
You'll be able to read about the directors in the company's Annual Report and Accounts, often with some information about their previous roles and achievements. You may be able to access the Report online or you may order a printed copy via our free Report and Accounts service.
Watch out for changes in the management team - who is leaving and why and who is joining and what skills they bring. Keep an eye out for directors' share dealings as well. If they're buying it may be a sign of confidence in the business and an indicator for you to do the same - but do your research as well.
If theyre selling it is worth trying to find out why (it may not be a sign the business is heading for trouble - it could just be a tax bill or divorce settlement that needs paying!).
Top Tip #5 Watch the numbers!
You can check out share prices on Moneyextra either by searching on the company name or its EPIC code - each share page will show you a graph of how that share is performing. You may manipulate this graph to display share price performance over a variety of time periods and you may compare the price performance of the share with other shares or against stock market indices.
You'll also see the following information:
Company name - We show you the name of the company and its EPIC code (this is the unique code, usually 3-4 letters although sometimes more, assigned to the company by the London Stock Exchange).
Sector - We'll also show you the sector the company is in. Click on the sector name and you'll be taken to a Moneyextra page which shows all the shares in that sector.
Prices*
- Mid - the middle of the bid-offer spread, an easy reference point, no more.
- Bid this is what you'd sell the shares for if you decide to dispose of them.
- Offer - this is the price you'd pay if you decide to purchase the shares.
- Open - the price at which the shares opened trading today.
- High - the highest price today.
- Low - the lowest price today.
- Close - the previous day's closing price.
*Please note that for technical reasons the share prices displayed on Moneyextra are not 'live' but are delayed by 20 minutes. If you want to see 'live' share prices you must be logged on to your Moneyextra Share Dealing account (provided by The Share Centre).
Change - This shows you how much the share price has changed, either up or down. Changes and prices are shown in pennies. Thus a share price shown as 1735.00 is actually worth £17.35.
Change % - This shows you the percentage change in the share price on the day.
Volume in 1000s - This shows how much turnover (the number bought and sold) there has been in the shares on the day. You can also see this illustrated in graphical form below the share price graph.
In your Moneyextra Share Dealing account (provided by The Share Centre) you'll also be able to see:
Yield - the income (dividend) paid on the share shown as a percentage of the current share price; e.g. share price 150p, dividend 7.5p, yield 5%.
Price / Earnings Ratio (P/E) - calculated by dividing the share price by the earnings per share; e.g. share price 150p, earnings per share 10p, p/e 15. Effectively this means that it would take the company, in this example, 15 years to 'earn' its share price. In broad terms, the lower the p/e, the better value the shares.
Top Tip #6 Beware of trying to 'time' the market
You should always check the recent price performance of any share you are thinking of investing in - that stands to reason. But don't just look at what the price has done. Try to work out why it has done what it did. What news has impacted on the share price? What is the stock market sentiment towards the share?
There are always two sides to a stock market story. A share that is low in value may represent a good buying opportunity OR it may be low in value because the company is losing money. A share that is rising, may rise further as the company makes greater profits or it may be overpriced and due for a 'correction' that will see it fall back.
Trying to time your investments 'just so' is almost impossible. In fact, the most successful private investor in the world, Warren Buffett (by no co-incidence, the second richest man in the world after Bill Gates) does not rely on market timing but instead chooses reliable, profitable companies that pay good dividends.
What you may, more easily, do is, on the 'upside' set yourself a target profit for which you would be happy to sell the shares and, on the 'downside' set a maximum loss you would be prepared to accept before you bail out. You may set alerts and limits on your share investments within your Moneyextra Share Dealing account (provided by The Share Centre).
Request Free brochures on share dealing, spread betting and CFDs.
Top Tip #7 Don't put all your eggs in one basket
Alright, it is a cliche. But cliches become cliches for a reason! Investing in a range of companies will help reduce your overall level of risk. Let's be honest, not every investment you make is going to be a winner. Spreading your investment around means diversifying into different stock market sectors as well; having all your investments in several different companies that operate in the same sector is almost as risky as putting all your money into just one company.
However, don't spread yourself too thinly. Structure your portfolio of investments to take account of how much money you have to invest. Remember to take account of your dealing costs. They can eat into any profit you may make. The 'right' number of companies in which to invest is not a precise science and depends on your individual circumstances.
Keep an eye on what others are saying about your shares. But beware of newspaper tips that are, all too often, too late - by the time it is published and read, the 'news' is already reflected in the share price.
Top Tip #8 Know how your share price can be affected
Share prices can be like horses - easily 'spooked'! Many things will affect the value of the shares you own. Stockbrokers and investment banks employ teams of people to analyse them whereas you're on your own. But there are plenty of obvious things you can be doing to understand what's likely to move your shares up or down.
Keep an eye on the news and not just the financial pages. For example, a high oil price might be good news for oil producers but itll hit transport businesses. A cold winter might be good for electricity providers but bad news for retailers.
You may also need to watch what's happening overseas. Many UK companies now have some or even most of their business operations overseas; so you need to know what's happening in the countries those businesses operate in.
Factors like a country's economic climate, legal climate, political climate and even physical climate will all have an impact. Look also at interest rates and social trends and, if you're investing in a company with big foreign exposure, watch the exchange rate as well; rising share prices can be speedily undermined by falling exchange rates.
Please remember that past performance is no guide to the future and that the value of shares, and the level of income they provide, can fall as well as rise.
Moneyextra's Investment Centre contains all you need to know about investing in the stock market.
24 January 2008 © Moneyextra.com
MoneyExtra.com recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.