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29.01.2009 Feature Article

10 Tips to consider when buying shares

10 Tips to consider when buying shares
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The rapid development of the Ghana Stock Exchange, efficient work of business journalists, and the spread of both commercial and investment banks in the country have paved way to trading of shares by the general public. From an economist's view, it is a good beginning for a developing country such as Ghana because the marginal propensity to saving or investing (MPS) is on the increase.

This is the time for financial analysts to add their bit to help create a sound and competitive investing environment by educating the public on issues to consider when selecting stocks for purchase. The ten most important considerations are outlined below.

Know What you're looking for
Different shares have different characteristics and it is important to understand what you are looking for. Primarily, investors buy shares either to see growth in the value of the shares, or to receive an income in the form of dividends. For income, choose a company that pays a high yield and compare it with others in the sector. You can work out the yield by dividing the dividend paid by the price of the share e.g. price 300p, dividend 12p per share gives a yield of 4%. These can be accessed from Databank's website, the Ghana Stock Exchange, from the quarterly or annual reports of the respective company or from the Business and Financial Times. Growth shares come in many shapes and guises. These include: Companies expanding via acquisitions - check out the logic behind the acquisition, especially if it's based on 'cost savings' as they're often easier to capture on paper than they are in practice. Companies developing new technologies, products or services - try to get an understanding of development timescales and check to see if it is a development based on their existing skills or it's altogether new stuff as it might take longer to attract good market. Companies that could be attractive takeover targets - this can lead to a short-term hike in the share price that can also evaporate quite quickly, so keep a close eye on news.

Decide what level of risk you can allow
Before buying shares you need to decide what level of risk you are prepared to take. Are you looking for shares that don't carry too much risk, or are you prepared to accept higher risks in return for the prospect of higher returns? 'Risk' is quite a complex concern, for many factors can be taken into account - not all 'big' companies are 'safe'. Shares in general are viewed as moderate risk compared to other types of mainstream investments. In the broadest terms, if you are a cautious investor then a portfolio of solid, 'Blue Chip' could be appropriate. However, if you are a more insistent investor it may be ideal to look at newer and smaller companies where the greater risk of loss carries the potential for greater rewards.

Know the company
Do you actually know what the company does? This may sound simple but many investors do not actually know what business the company is in. Companies quoted on the stock market should be sorted into sectors (e.g. utilities, transport, retailers) to give a broad idea of the company's main activity. Newspapers can list their share information by sector, so it may be easier for the public to see which sector a company is in.
Before deciding on the company specifically, take a look at the prospects for the sector. Is the oil industry performing well as a whole? What challenges do financial companies face in general? Whilst an individual company may be doing well, if it is operating in a highly competitive or fast-moving sector its fortunes can change quickly. Once again these can be accessed from Databank's website, Ghana Stock Exchange, from the quarterly or annual reports of the respective company or from the Business and Financial Times
Then, look in more detail at the company to get a good understanding of what their core activities are, and therefore where their earnings come from. Look at what they do, who their competitors are, and how they compare - you're looking for what's going to give the company an edge over their rivals.

Know who's running the business
When buying a share in a company, you are literally buying a bit of the business. So it's important to know just who's actually running the business! After all you will be entrusting them with your money. You'll find a profile of the directors in the company's Annual Report and Accounts, often with some information about their previous roles and achievements. You can often access the Report online. As well as the skills of individual directors, look at the balance across the Board too - they are a team and need a mix of skills. Keep eyes on any new directors joining the company and any financial comment on the management in general. And watch for when they're buying shares - it shows confidence in the company and may be an indicator for you to follow suit. But still do your research too!

Check out the numbers
Many daily newspapers list basic financial details for a share trading on The Ghana Stock Exchange but the actual content varies from paper to paper. They show you the core numbers to look at, but you can get a more comprehensive feel for the overall financial performance by using the company's annual report, consulting an analyst or your broker. If you're looking in the paper too, here's what you'd typically see: Business and Financial Times is used as an example: Company name - fairly obvious this one! Companies are grouped alphabetically. Price - the price shown is the closing price at the end of the previous trading day. This is effectively a 'mid- price' and not what you will actually pay for a share (the offer price) or sell it for (the bid price) - the mid-price is an easy reference point but that's all.

If this seems confusing just remember that you will normally pay more than the price shown in the paper when you buy a share, and get less than the price shown if you're selling.

Change - this column shows how the mid price has moved (up or down) compared to the previous day's price. Monday's paper shows the change on the previous week. Yield (YLD) - the income (dividend) paid on the share shown as a percentage of the current share price. For example, a share with a mid-price of 200p paying a total dividend of 20p in a year gives a yield of 10% (20p / 200p x 100). Price / Earnings Ratio (P/E) - calculated by dividing the share price by the earnings per share. For example, share price 250p, earnings per share 10p = a P/E of 25. One way of looking at it is to say it would take this company 25 years to 'earn' its share price.

It is a good guide to the relative value of one share compared with another, though best used only when comparing shares in the same sector as different sectors tend to work on different price multiples. In the broadest terms, the lower the P/E, the better value the shares.
Volume (vol '000s) - the total number of shares, in thousands, that were bought and sold during the previous day's trading.

Take a broad view
Some listed companies have their mother businesses overseas and that can have differing effects on the share price performance. Factors like a country's economic climate, legal climate and political climate will all have an impact as well as their physical climate. Keep close marking on things such as interest rates, GDP, political outlook and social trends. And don't forget exchange rate, a rapid rise in a share price can easily be eaten away by a falling exchange rate! Reading financial pages from news papers will help.

Think about your timing
Check the recent performance of a share you are considering buying to get some idea of what the market thinks, and try to work out why changes happen. Has the company announced a new product which is expected to do well, or is there speculation of a take-over? If it proves to be just that, mere speculation could see you paying too high a price? It's an old cliché, but nevertheless true, that it takes two views to make a market. A fall in the price of a share may either represent a good buying opportunity, or it might be an indication that the company is struggling and therefore best avoided. Likewise, a share which has risen rapidly in a short period may now be overpriced and due for a 'correction'.
Don't try to get the timing just right you hardly ever will! Instead, think about setting a target profit level which, if realised, you'd be happy to sell the shares for. And on the other side, set a maximum loss you'd be prepared to accept before recognising you may just have called that one wrong!

Keep an eye on the news
Many things will affect the value of the shares you own. It's difficult to factor every possibility into every decision, and even harder to keep an eye on all the things you'd need to be aware of - after all brokers employ large teams of people to look after just one sector. So trying to keep an eye on your own is difficult. But one thing you can do is think about the impact of things you read and hear about in the everyday news. It's not just the financial pages that can help you steer you one way or another
For example, a high oil price should obviously have a positive effect on the share price of oil companies, but it will hurt a company such as Ghana International Airline, whose fuel bills will increase.

Don not put all your eggs in one basket
Spreading your money across various companies helps reduce the overall level of risk. Not every investment decision you make will produce the desired result, but spreading them evens out the odds. Diversity means investing in different sectors too; it is just as risky as to have all your money in several different companies operating in the same sector. However, the other side of the coin is spreading yourself too delicately. You cannot expect to keep up with everything that is going on, so don't build too diverse a portfolio. For example, if you are new to the market and have GH¢5,000 to invest, you could look to have maybe two or three companies. Or you might consider using mutual funds as a good way of getting some diversity without increasing the number of individual holdings. If you already have shares in a number of companies, it may be more suitable to add to these investments, or sell some and re-invest the proceeds into the remaining holdings. The 'right' number of companies in which to invest is not a precise science and depends on your individual circumstances. For further advice about what may be best for you, as a customer you can consult qualified advisors.

Don not be afraid to have a second opinion
As Donald Rumsfeld famously said, there are known knowns, known unknowns, unknown knowns and unknown unknowns! Basically you know what you know, but all too often you do not realise that there's information available that you don't know about. To avoid this, get another view. Newspaper tips are, all too often, too late by the time it is published and read, the 'news' is already reflected in the share price. Hence, you might follow your favourite tipster's latest offering, but you should still do your own research.
To see the general market's view I will entreat business journalists to devote more time and space to company information so that politicians can have a little breath.

Credit: Nii Akwei Moffatt
(Graduate Finance and Investment Analyst)

Nii Akwei Moffatt
Nii Akwei Moffatt, © 2009

The author has 1 publications published on Modern Ghana.Column: NiiAkweiMoffatt

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