Stock Markets Explained

If you're new to buying shares, the whole area can seem rather daunting and confusing. Like so many things, the best way to learn about share dealing is by doing it, so here are a few pointers which may help you start off.

Familiarity and Common Sense

Think about what sectors you are familiar with. For example, you may have noticed your bank has closed your local branch. This could be because they are in difficulty or it could be because they are trying to cut costs which can positively affect the share value. You may also be familiar with a certain sector for other reasons. Many people choose to buy shares in the company they work for as they have a dynamic knowledge of how well the firm is doing. The same can apply to investing in other firms in the same industries.

Research

You can now undertake some basic research; here is a list of some fundamental questions to have in mind:

• What sorts of factors have affected share value and how do these relate to what you know about their current position?
• Are profits growing, and how has this been reflected in the dividends paid out?
• How volatile is the company's share price? This might not necessarily be a bad thing if you think you are buying at a time when the value is low.

You should consider whether you want to earn money from the shares in terms of dividend payments, or short or long term increases in share value. It can be worth buying shares in an established but under performing company, for example, if you have the patience - and resources - to ride out the time it may take for the company to reverse its fortunes.

Analysis

This is the element that scares some would-be investors away. Analysis is essentially looking at the relative size of figures in order for you to make a decision. Here are a few basic tools you can apply to help make a decision.

Yield

This is the dividend paid per share divided by the share price. It gives a rough indication of whether it's worth paying more for a more expensive share that has a higher dividend payment (for example, it may be worth simply buying more of the cheaper shares).

Price to Earnings ratio

This compares a company's share price with its earnings. This is done by dividing a company's price by the earnings on each share. It gives a better picture of the company's performance as the dividend used in the yield is decided by the company: there may be a good reason for a low dividend payment (for example, investment for future growth).

Summary

If you can combine your existing knowledge and instinct with some basic analysis, this can be used as a starting point for future investments. As you become more confident in your decisions you can continually try more complex analysis and start to vary your portfolio, but it's always best to remember to stick with what you feel comfortable with.