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How much research should I do before investing in Stocks and Shares?

December 2017


Tags: First Time Investors

Before getting into the details of what information is available to research for certain types of investments, deciding exactly what type of investment is right for you should be the very first piece of research you do.

Are you looking to buy individual company stocks or are you more interested in the sector or region in which that company operates?  Using a fund or an ETF to access a sector or region is quicker and cheaper than trying to buy individual company stocks, so make sure you know exactly what you are trying to access with your investments and then base your research accordingly.

The information available to you on different types of investment will change depending on the type of investment you choose and the amount of research that you need to do may be different as well. For example, if you are choosing to invest a large amount of money into a single stock, it may be more appropriate to do in-depth research into the performance of that company before you buy, whereas traditional funds are managed by experts that will do the majority of the research for you.

 

If you are investing in individual stocks

If you want to invest in an individual company, there are several ways you can start researching.  

Publically listed companies (Plc) have to release certain information about company performance, including their profits (or losses), their turnover and comments from the management about previous performance and the year ahead.

If the company is listed in the UK, its official reports will be available on the London Stock Exchange’s regulatory news service (RNS), here http://www.londonstockexchange.com/products-and-services/rns/rns.htm or https://www.investegate.co.uk.

Key documents to read are the final and interim figures, which are six monthly financial updates, as well as any updates about profits, which may tell shareholders that things are not going well (or that they are going better than expected).  Individual stockbrokers also put out research on different companies, and how they expect them to perform. They are often quoted in the financial press - the Telegraph’s Questor Column, The Times’ Tempus Column and the FT’s Lex column are good places for this type of information.

Understanding how experts value stocks is really helpful. They tend to look at the price/earnings ratio, which is simply the share price divided by the company’s earnings per share (or in some cases projected earnings). This can help you to see whether a stock is more or less expensive than others in its sector. The greater the price/earnings ratio, the more expensive the stock may be (although of course that’s no guarantee of performance). It is also possible to see historic share price charts online over one, five and even ten years.

The other factor is the dividend yield, which is the amount of money the stock pays as income compared to its share price. Not all stocks pay a dividend, but if income is important to you, this may be a factor to consider. If you are worried about how secure the dividend is and whether the company may stop paying it, you could look at dividend cover, which is how much of the company’s profit it is paying out of income, to see how sustainable the payouts are.

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If you are investing in mutual funds

Different funds concentrate on different areas, and some have an expert fund manager to do the picking, while others simply replicate the performance of an index such as the FTSE 100.

If you are interested in buying a fund you can study its Key Investor Information Document(KIID), a piece of compulsory information about how the fund has performed in the past and whether it has beaten or underperformed other funds in the same sector. These are available on the fund manager’s and Selftrade website.

You can also study past performance using these documents, as well as the top investments within the fund and its stated aim. You should also look carefully at the costs of investing in the fund, which may include management charges and other fees.

Learn more about mutual funds and see what’s available to invest in

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If you are investing in exchange traded funds (ETFs)

Exchange traded funds are an increasingly popular way to track an index using a single investment that can be bought and sold on the stock market. These funds also have factsheets on the websites of the ETF provider and Selftrade which should give you details of the fund, its objectives and past performance.

It is also important to find out whether the ETF is ‘synthetic’ or ‘physical’. A synthetic ETF holds a variety of contracts with other providers that help it to replicate the performance of a certain index. A physical ETF holds the underlying stocks. Opinion is divided on the safety of different forms of ETFs but you should do your homework and form your own opinions before buying.

Learn more about ETFs and see what’s available to invest in

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Selftrade does not provide investment advice. This article is the authors view and is not the view or opinion of Selftrade and Selftrade accepts no liability for any loss caused as a result of the use of this information. The opinions expressed are those of the author at the time of writing and should not be interpreted as investment advice.

The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance. We do not provide advice or make recommendations about investments. If you have any doubts about the suitability of an investment, you should seek advice from a suitably qualified professional adviser.

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