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 – writes Christian Leeming

 
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

 

What are stocks and shares?

 
Stocks and shares are familiar terms and are often interchangeable; in fact, the ‘stock’ of a company is all of the shares into which ownership of a company is divided but, in the U.S., investors say they own ‘stock’ rather than ‘shares’.

Whatever term you use, and equities is another often in use, investors buy shares with the expectation that over time, the value of the shares will rise.

Companies issue shares as a way of raising money so they can fund and plan for growth. Shares are bought and sold electronically on a stock exchange, and many countries will have their own exchange.

The UK has the London Stock Exchange (LSE) where investors can find and buy shares in companies listed here but also shares from companies listed on other major exchanges such as the New York Stock Exchange (NYSE).
 

How is the price of shares determined?

 

The price of shares should reflect the performance of a company and expectations of how it will grow and sustain its profitability.

As it is not possible to know what the future holds for any corporation, investors take a rational view on what market factors are at play but sentiment undoubtedly has a part to play in share price too.

If investors believe a company will perform well, its shares attract buyers and push prices up. If a company falters, its investors lose confidence and look to sell in greater numbers, and so its share price will fall.

 

Think time in the market, not timing the market

 

‘Time in the market, not timing the market’ is an old adage and is based on hard-won investing wisdom. No investor can judge the right moment to buy or sell every time.

Plus, it may seem counter-intuitive but volatility can provide opportunities. Some of the best days in markets often come immediately after significant falls as investors can pick up shares at a good price.

Investing regularly and over the longer-term usually produces positive results and you can read more about strategies for investing elsewhere on this site.

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).

‘Understanding how experts value stocks is really helpful’

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.
 

If you are investing in mutual funds

 

What is an investment fund?

 
An investment fund pools money from lots of investors and is used to buy a range of assets – giving investors an instant stake in a number of holdings and the benefit of expertise within the fund.

Funds are popular as these ready-made baskets of securities are a great way to invest a diversified portfolio, with low ongoing fees, ease of trading and flexibility all adding to their appeal.

Whether funds (also known as Mutual Funds, Unit Trusts and Open-Ended Investment Companies), Exchange Traded Funds (both physical and synthetic) or Investment Trusts, they give you access to a group of financial assets without having to buy them individually.

Funds are a simple way to invest in a range of leading companies where managers decide which companies to invest in, when to invest and how much of a fund’s money to commit to a particular company.

But you’ll need to be in it for the long-term, at least five years. That way you have a better chance of riding out any short-term market volatility and enjoying greater returns.

 

Why do investors choose funds?

 

Simplicity – Funds are a simple way of accessing investments from leading companies around the world. As you’ll have a share of several different asset classes, it is considered lower risk than buying shares in one or two companies as any change to one share can be offset by the performance of the others.

Expertise – Because teams of professionals spend their time researching thousands of investments, you’ll typically pay more for an actively managed fund, but there’s potential for much higher returns. It also means someone is tactically managing your investments, so when a region looks like it might be on the up, or a sector starts to suffer, the fund manager can decide to move your money around to expose you to growth or protect you from any losses.

Choice – You get to decide which funds to buy into based on your attitude to risk and how long you plan to invest for – including funds to get you started, funds to build up your portfolio and funds for seasoned investors

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 your broker’s 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.
 

If you are investing in exchange traded funds (ETFs)

 

What are ETFs and ETCs?

 
Exchange traded funds (ETFs) and exchange traded commodities (ETCs) combine the benefit of a fund and a stock in one investment.

They are a popular choice as they give you access to diverse investments through a single low-cost product.

As their names suggest, exchange traded products are traded on exchanges such as the London Stock Exchange. In general they track a benchmark market index like the S&P 500 or FTSE 100.

Investing in one is like buying a basket of stocks that rarely changes, where performance is tied to the overall index itself.
 

How do they work?

 
Exchange traded funds (ETFs) can track hundreds of stocks across various industries and asset types including banking, equities or property, with exchange traded commodities (ETCs) a convenient way to invest in single markets like livestock, precious metals or natural gas.

Whatever the focus, all are marketable securities, so have an associated price, and can be bought and sold during a trading day, just like a stock.

Each share within an ETF or ETC gives its investors a proportional stake in the total assets. Most are open-ended meaning there’s no limit on the number of people who can invest. The majority are passively-managed and so with no fund manager, they have much lower fees.

 

Why choose ETFs and ETCs?

 

Whether looking to build up wealth or generate income, these exchange traded products meet a variety of investor needs and have become a popular investment choice since their introduction in the early 2000s.

Both ETFs and ETCs combine the benefit of a fund and a share in a single investment. Plus, they can be bought in areas of the world that historically have not been easy for small investors to gain access to, such as Brazil and Taiwan.

Other advantages include ease of diversification and trading flexibility as well as pricing transparency, liquidity, lower costs and tax efficiency.

ETCs enable investors to have easier and cheaper exposure to commodities. They also relieve investors from the risk of having to play the futures market or the risk of having to take delivery of the underlying commodity itself.

Because ETFs and ETCs can be traded on an exchange in the same way as an individual stock, investors can use them to make quick trading and asset allocation decisions. You can switch between different asset classes, themes or sectors, helping to diversify your portfolio and manage risk.

By tracking the performance of a benchmark index, they often have lower fees than other types of actively managed investment funds, which must cover expenses such as management fees and more frequent trading costs.

Another benefit relates to buying and selling flexibility and transparency as they have transparent portfolios, priced at frequent intervals throughout the trading day. The opportunity for daily trading means you can take advantage of price movements.

As well, ETFs can be traded using Stop and Limit Orders which means you can specify the price points at which you are willing to trade, helping to overcome behavioural and pricing risks.

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 your broker 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.
 





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