Monday, 23 April 2012

How do I research shares?

This is a post for beginners on how to research shares you may want to invest in. I wrote this post because a friend of mine (who does not invest regularly) sent me a list of 4 shares she was considering investing in but it turns out she had not done any research in the companies and didn't know how to.

This post will cover the minimum amount of research you must do before you invest in any shares. If you are not willing to spend the time doing this research you should really just invest in indexes. They offer share market returns without the need to keep up to date with individual companies (on the downside you can never outperform the market)

Read the annual and interim reports for at least 2 years

  • In a country like Australia or the UK this will be 4 reports - 2 annual reports and 2 half year reports, In the US you will have more like 8 reports for the same period

  • You do not need to read the whole report in detail - but reading a number of reports from the same company will give you a feel of the company as well as what is important to it and what drives its results.

  • What sections should I read in an annual report? The essential sections to read in an annual report include the management commentary on how the business has gone and the financial statements. The notes to the financial statements give them a lot more colour and you will find yourself referring to them constantly to see what things mean (e.g. the borrowings section will have a note breaking out all the borrowings of the company)

Try and read broker and industry reports

  • It is often hard to get your hands on a broker report however your stock broker should provide reports on companies in your home market

  • The best way to search for industry reports is to google for them. You will be amazed at the free information that you can find on various sectors of the economy. There are often in depth news articles which will cover exactly what you are looking for

  • Broker reports with their 'buy' and 'sell' recommendations should never be taken at face value. Brokers are right as often as they are wrong. You are using their reports to get a better understanding of the company you are looking to invest in.

  • Industry reports, like broker reports should be used to inform your understanding of the industry and where your target company sits

Research the companies competitors

  • You want to know how much competition the company has and how effective it is

  • Do this by looking at their disclosures / financial statements if they are a listed company or just by going to their website and having a look at what they offer versus the company you are looking to invest in

  • Also you may find that one of the competitors is in fact a better investment

Always research your companies with an open mind

  • Often when we research for the purpose of investing we are only researching those companies which we are already interested in

  • The danger in this is that we are looking for information which proves our thesis. I prefer to search for information which disproves my thesis to make it easier to cut companies where the investment does not stack up.

The research is not a one off task

  • You should be constantly keeping up to date with the companies you invest in. It is easier however once you have done the initial research because then all you need to do is read the reports as they get released which takes a lot less time

All of this research may sound like a lot of work but there really are no shortcuts. If you start taking shortcuts then you have less of an understanding than the next investor in the market which puts you at a disadvantage. I recommend doing the above as a minimum amount of research. If I have missed anything let me know and I'll add it to the post as I am hoping this will be a useful resource for beginners.

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