Forward Diary

Stocks & Shares - How to pick stocks

There are many drivers of share prices and different investors take a varied approach to each of them. The main ones are: Company fundamentals – information and data on the company’s finances, its markets, competitive position, strategy and so on. News flow – announcements to the stock market via the LSE’s Regulatory News Service. Share price performance charts. 
   Here is the news... 
 All companies must by law produce reports for shareholders detailing a review of their business performance, a description of principal risks and uncertainties and an analysis of performance. 
They must also disclose known information about the company’s future plus any events that have happened after the balance sheet date to give a true and fair view of the accounts, with information on dividends proposed and paid. 
Most companies report their results for the full year (final or preliminary results) and half-year (interim results). Some also follow the American practice of providing quarterly reports. 
 Publication of the annual report follows some time after the final results and is a source of additional information, as well as being better presented. Unlike other announcements, it is usually audited. Companies also provide various trading updates during the year. They are required to produce a biannual ‘interim management statement’, or IMS, and many issue a trading statement before they enter their ‘close period’. Under UK listing rules, a company enters a ‘close period’ normally starting 60 days before the release of its final or interim results, during which directors or senior managers may not trade in its shares. Price sensitive Usually companies refrain from making price-sensitive announcements, including trading statements, during this period but issue a statement just before it starts so that investors have information that is as up to date as possible. If events dictate, however, a company may still find itself having to make an announcement during its close period. It is common for a statement to be made at the AGM, usually by the chair- man, including information on trading since the end of the financial year. Often this will be combined with an IMS. In principle, listed companies must disclose any information likely to affect their share price to the market. Often the RNS announcements include news of contract wins, joint ventures, acquisitions, financing agreements, board appointments, drilling reports and the like, some of which may seem more like PR than regulatory news. The most important statements from the point of view of investors, however, are those that reveal information on possible offers for the company (with the possibility of a pay-day for shareholders) and those that deliver profit warnings, when the company reveals its results are likely to fall short of expectations. A large number of RNS notices appear daily between 7am and the opening of the London market, with more coming out later in the day. News services such as that provided by provide a précis of the important announcements which is much easier to read than some of the often-convoluted official versions.  Investors will find plenty of meat in the results announcements, including key information on revenue, profits and dividends. However they should not get carried away by an apparently good or poor set of figures. The performance may have been largely expected by market analysts working for the big investment banks and broking firms, whose job it is to forecast company earnings not just this year but one, two or more years ahead. Even an announcement of healthy profits may be followed by a fall in the share price if the figure is below the consensus of analyst expectations, and equally the price might rise if the results are not as bad as they’d been expecting.    Why a profit can be a loss Given the stream of previous trading statements updating the market, one might have assumed that there should be no surprises when the results themselves appear. Strangely this is not the case – even the biggest and most trans- parent companies still have the capacity to surprise on the upside or downside. However, for longer-term investors the results are more useful to help them get a bigger picture of how a company may perform in future, rather than its short- term share price movement. These financial statements are not always easy to get a handle on. For a start, there are various ways of reporting a profit or a loss. The ‘statutory’ figure, following accounting rules, seems the obvious one to go for, but companies rarely highlight this as their headline result. Various one-off costs can be regarded as ‘exceptionals’, particularly redundancy costs if the company has had to tighten its belt. It may choose to focus on operating profit, EBITDA (earnings before interest, tax, depreciation and amortisation), so-called ‘adjusted’ or ‘underlying’ profits. It will often disregard the impact of businesses it has sold and focus on ‘continuing’ business. Such reasons are perfectly legitimate and the company’s aim is to provide the best indication of how it is really performing. It is always worth checking to see if there are less flattering figures further down, though. Finding the figures You do not have to wait for the results before researching a company’s fundamentals. Such information is available from various websites, including MoneyAM, and sometimes via the company’s own website. Dates for upcoming results, trading statements, AGMs and EGMs are also available on MoneyAM. A good stockbroker will also provide research tools and information for its clients. Investors should inspect the main financial information available and read what the company says about its outlook before they decide whether it’s worth buying the shares. They should also inspect the key ratios such as price/earnings (PE) and take a look at what the analysts are thinking as indicated by the consensus earnings forecasts. Analysts produce a stream of research notes on companies every day, which include buy, sell and hold recommendations (or equivalent ratings) and their target prices for the share. Markets will often react when a major broker produces an upgrade or downgrade for a share, driving the price up or down. Information on such changes is not readily available to the public but news services often pick it up and MoneyAM produces a daily round-up of broker moves. Directors’ deals Given the volume of information churned out by the RNS every day, it’s not practical to read everything. Choose the companies you want to follow and where possible set alerts to warn you of share price movements. Among the useful pieces of information that appear on the RNS are statements showing buys and sells by directors in their own companies’ shares. These are some of the most closely-followed announcements as they represent the nearest thing you can get legally to trading with inside knowledge. The theory is that a director should have a pretty good idea about what his company’s prospects are. If the director buys or sells a significant number of shares, it’s taken as a signal to other investors. You have to be a bit careful here and if possible discover any reasons behind the deal. Sometimes smaller companies say directors are selling to meet demand from institutional investors for their shares when there is not enough stock available in the market. Such an assertion becomes more credible if they can actually put a name to these hungry institutions! Directors may also say they are only selling to meet an urgent personal need for cash, often to fund a divorce. Such stories are reported weekly in Shares magazine and details of directors’ deals are listed on, as well as in the RNS announcements. • Share price charts also provide key information before you consider a deal. After all, if a share has been consistently falling over a period, you need to have a good reason to think it will turn around.   This ‘How to’ guide is produced by Shares Magazine and is only for general information and use, and is not intended to address particular requirements. The value of investments and the income derived from them can go down as well as up. Past performance is not necessarily a guide to future performance. You should get professional financial advice before making any investment decisions.


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