Ritu Vohora, Investment Director at M&G Investments gives her top 5 tips to buying shares.
1. If you are new to investing then buying single stock, aka shares from one company, can be riskier than buying a fund that invest in many companies. Individual share prices can fluctuate, but portfolios with many shareholdings diversify some of the risk because you aren’t putting all your eggs in one basket. If you already have a diversified portfolio of funds, you may want to consider adding individual stocks.
2. When you buy shares you become a shareholder of a company. So, short-term market movements aside, the value of your investment depends on the health of the underlying business. Look for businesses that are run in the interests of their shareholders with robust balance sheets, strong capital discipline and solid cash-flows, sustainable business models and stable management teams.
3. Importantly, the return from an investment is largely determined by how much you pay for the stock. Overpaying means you will not get as good a return and it may not be a good investment. But, it’s also important to be mindful that sometimes a stock is expensive because the company’s earnings are expected grow sustainably. On the other hand, a stock may be cheap because its business is underperforming. Look for a stock that offers a combination of an attractive price and can deliver future earnings - you want to buy stocks that you can reasonably expect will be worth more in the future.
4. Take a long-term approach so you can ride out the ups and downs of stock price fluctuation.
5. There are two ways you may benefit from buying shares: If the share price rises (‘capital growth’) and/or when the company pay-out profit in the form of dividends to their shareholders (‘income’). Before buying, you need to decide if you want to generate ‘capital growth’ or an ‘income stream’ from your investment. If you are looking for shares that provide an income stream you should consider companies that have strong cash-flows, pay a dividend and can grow their dividends over the long-term. It can be tempting to go for the highest yielding investments, but often these come with higher risks. It's important to consider if the stock can sustainable grow the income pay-out.
You can find more from Ritu in the Equities Forum.
*When choosing investments, it is important to remember that their value and the income from them will fluctuate. This will cause prices to fall as well as rise and you may not get back the original amount you invested. We are unable to give financial advice and these views should not be taken as a recommendation, advice or forecast . If you are unsure about the suitability of your investment, it is best to speak to your financial adviser.