Choosing shares to buy
Picking which shares to buy
Choosing shares to buy and sell requires a lot of time, research
and analysis. You are also competing with professionals who have
more experience and have access to additional information.
However, if you're willing to put in the time and keep an eye on
the market and economy, shares have the potential to grow your
wealth over time. Here are some tips to get you started.
Understand the economy
and financial environment
As a starting point, it's important to educate yourself about
how economic and market changes can impact a company's
The more reliable the information you have, the better your
decisions will be. Here are some places where you can get
information about market changes:
- The Reserve Bank of Australia's quarterly
Statement on Monetary Policy for commentary on the Australian
- The business section of reputable websites, magazines and
newspapers for new economic information
- The research department of banks and stockbrokers for forecasts
about economic conditions
Topics to keep up-to-date with include:
- The Australian economy
- Interest rates
- Government policy
- Exchange rates
- Investor sentiment
- Overseas economies and markets relevant to the business
You should also focus on industry specific or even regional
influences that might impact a company's profits.
Finding shares to buy
Blue chip companies
If you are going to choose your own shares, a good place to
start is with the S&P/ASX 50, a list of Australia's top 50
companies, commonly known as 'blue chip' companies.
Blue chip companies tend to be long established, stable
companies that suit investors looking for steady returns with less
Companies that don't have a long history and are not in the top
100 companies in Australia are known as 'speculative' companies.
While there may be potential for a large return, be aware that the
opposite is also true and you could potentially suffer large
Speculative shares are most suited to experienced investors who
are prepared to risk their initial capital in the hope of higher
Buy what you know
You could consider participating in an employee
share scheme if the company you work for has one, and you
understand how it operates.
Start with an industry or business you understand. You have a
much better chance of recognising if a company is weak or strong if
the industry is familiar to you. Check out the Australian Securities Exchange (ASX) list of
companies or the Chi-X website for a breakdown of industry
Once you have a list of companies it pays to consider the
competition that a company faces and how it compares to others in
You should find out:
- What is the company's position in the market?
- Are the goods and services it provides likely to be in demand
in years to come?
- Are there opportunities for the company to grow in the
You can get more tips from our section comparing companies in the same industry.
Capital growth or income?
Work out what you want from your shares. Do you need regular
income or do you just want capital growth?
If earning a regular income is important, then you may want to
look at companies that have a track record of paying high
dividends, which tend to be the larger companies on the ASX.
Smaller companies are often focused on growth, so they are more
likely to reinvest their profits in the business, rather than
paying dividends to their shareholders.
Each sector of the market has its own benefits and risks. For
example as a general rule:
- Financial sector - Banks and other financial
institutions usually offer steady income through high
- Resources sector - Mining companies offer
potential for high capital growth but tend not to provide large
dividends. This industry can be highly cyclical, which means it
does well when the international economy is healthy, but badly when
it is suffering.
- Consumer sector - Retailers offer medium-sized
dividends. This sector tends to move up and down with the
The value of your investment depends on the health of the
business so it's important to research and compare before you
One of the best sources of information is a company's annual
contains many important things you need to know about a company,
- Core business activities
- Future prospects
- Whether the company is making a profit or loss
- Company strategy
Annual reports can overwhelm you with information so we've
identified several useful things you should look out for. See annual reports
for more details.
For more up-to-date information, set up a free Company Alert and we'll email you every
time a company lodges information with ASIC, including takeovers,
buybacks and floats.
You can also visit the ASX website and check the 'Prices and Announcements'
section, which lists documents received by the ASX.
The business section of the newspaper will also keep you
If a company is issuing shares for the first time, another
useful source of information is its prospectus. To find out more,
Share brokers will often give you access to research reports for
Comparing companies in the
Comparing a company to its competitors is one way of assessing
its value. Companies release a lot of key information that will
give you some idea of whether their share price is under or
Bear in mind that these are very simple comparison tools.
Professional investors will often take months to determine whether
a share is worth buying. They are trying to predict how much profit
a company will make in the years ahead. No one measure will give
you the information you need, so always use a range of sources.
Here are some comparison tools that you could start with:
- Earnings per share (EPS): EPS
is the portion of a company's profit allocated to each share. The
higher the EPS, the more a share is potentially worth. Companies
publish their earnings per share, so you can find this information
on their website, in their annual report or on the ASX
- Price earnings ratios (P/E): This can be a
good way of working out whether the price of a share is over or
undervalued compared to its competitors. In general, the lower the
ratio the better. But a low ratio is not always a good thing. It
could mean that the market expects earnings to be lower in the
future. To work out a P/E ratio, divide the current price of the
share by the earnings per share.
- Dividend yield (%): Dividends are paid from
profits and can be a good reflection of how the company is
performing. But a high yield is not necessarily a good thing,
especially if the dividends come from borrowings. To work out the
yield, divide the dividend per share by the share price.
Case study: Barry decides which shares to buy
wants to invest in shares so he uses the above comparison tools to
help him decide between two companies in the same industry.
Choosing which shares to buy and tracking their performance
gives you a sense of control and can be very gratifying. Just
remember to do your research and keep up to date with your
Shares are considered growth investments and can give you strong
returns over time; however higher potential returns usually come
with higher risks. Before you invest in shares consider what would
happen if you lose some or all of the money you've invested.
and return for more information about identifying and managing
One of the best ways to protect your portfolio is to diversify
- that is, to spread your investment between different industries.
Investing in, say, eight companies in different industry sectors is
less risky than just one or two.
That way, you can take advantage of each company's strengths and
are better protected if one industry has a bad year. Also, if one
company goes belly up you will only lose a part of your investment,
not your whole portfolio.
Building a portfolio of shares can be rewarding
but you need to have the skills and experience to make it
worthwhile. If you'd rather leave the decisions to someone else,
there are other ways to invest in shares. You might consider
investing in ETFs or a managed fund for example.
Last updated: 18 Aug 2015