Considerations when purchasing shares

Short-term: Any investment that you intend to hold for less than a year. The best stock investments to make if you intend to own a stock for less than a year are dependable blue-chip stocks that pay dividends. These come with less risks, as the corporations have a strong balance sheet.

Medium Term: One you want to keep for between one and ten years. One should invest in high-quality stocks from emerging markets with a modest level of risk for medium-term investing.

Long-term: Long-term investments are ones that you want to keep for longer than ten years. If the market improves, these investments will have time to recover if something goes wrong within the business or with the share market as a whole. Long term investments are often businesses that already have a very strong foundation and large market cap.

Value investing: Value investing is the practice of purchasing discounted stocks with the intention of making profits. These discounted shares are simply put as shares that appear to be trading for less than their intrinsic or book value. Quite often, the market reacts to good and bad news, resulting in share price movements that do not correspond to a company’s long-term fundamentals. This in turn offers an opportunity to profit by purchasing shares at discounted prices. Warren Buffett employs this tactic to generate enormous riches.

Growth investing: Growth investing is the practice of purchasing shares of companies that have outperformed the market in terms of sales and profits. Growth investors think that the upward trends in these equities will persist and present a chance for profit-making. Growth investors often look toward smaller, younger companies poised to expand and increase profitability potential in the future.

Income investing: Investors need to search for high-quality stocks that offer sizable dividends. These dividends produce money that can be spent or reinvested to boost future earnings potential. Consequently, you should think about the approach that works well with that investment style before purchasing a stock.   Many investors also utilise two or more of these strategies when looking for a suitable investment for themselves – for example, purchasing a share that has indicated a steady yearly dividend income, and also has the potential for large growth in the future.

Company size: The size of the company can indicate a lot of things for a potential investor. The size of the company indicates its previous successes and profitable margins. Larger companies tend to generate a lower risk investment, as they are often past the initial growth phase of their business and a steady incline is more often achievable. Large companies also tend to have more assets, workers and cash flow, creating a low-risk investment. The main way to find out a company’s size is to research their market cap. There are three market cap brackets that can identify the size of a company: large, mid and small cap companies. However, there is no universal definition for these market caps as different markets divide them according to different characteristics. 

Dividend history: As previously indicated, dividends are a very good way to bring in a form of income from your investments. It is important to research the company’s dividend history for an indication of how profitable that company has been in the past and what percentage they are paying to their shareholders. Dividends are important to many investors as they provide a steady stream of income (which could be beneficial, depending on your financial goal). The best dividends are often issued by large companies that have predictable profits. Some of the most well-known sectors with dividend-paying companies include oil and gas, banks and financial, healthcare, basic materials, pharmaceuticals and utilities. Shares that provide dividends of 6% or more are not unheard of in high-quality stocks. By comparison, companies that are in the early stages of building their business, such as start-ups, may not have enough profit to issue dividends to their shareholders.

Beta: Beta measures the volatility of the company’s share movements over the last 5 years. It measures the systematic risk involved with a business’s share compared to that of the entire market. The beta value is often found on the same page as the P/E ratio when reviewing share research pages. If a company’s share prices drop or rise in value more than the index over a 5-year period, it has a higher beta. With beta, anything higher than one is high; this indicates a higher risk. Anything lower than one is low beta or lower risk. Beta number also indicates some things about price risk. You have to watch high beta stocks carefully, as they can be extremely volatile. They have the potential to make you a lot of money, yet they also have the potential to take your money very quickly.

Fundamentals of the business: Researching the fundamentals of the company before purchasing a share is very important. Some of the most important ratios to consider before buying shares are Price-to-Earnings Ratio (P/E Ratio), Price-to-Book-Value Ratio (P/B Ratio) and Debt to Equity Ratio. These three ratios will assist you in making the correct investment decision.

Price-to-Earnings Ratio (P/E Ratio): This ratio contrasts the price of the stock with the earnings per share of the company (EPS). For instance, if a firm has a share price of $20 and generates earnings per share of $1 yearly, its P/E ratio is 20, which indicates that the share price is 20 times the company’s annual earnings. The P/E can be found by comparing the current market price to the total profits over the previous four quarters.  Compare this figure to comparable businesses that you’ve been investigating. There must be a good reason for your company’s greater P/E ratio than that of other comparable businesses. It is a wise investment to keep an eye on if it has a lower P/E ratio but is expanding quickly.

Debt to Equity Ratio: This ratio aids in figuring out how much debt the company has. High debt levels are not a good sign since they can potentially indicate bankruptcy or a very new business.

Price-to-Book-Worth Ratio (P/B Ratio): This ratio divides the stock price by the number of outstanding shares after comparing it to the net asset value of the company’s holdings.

Understanding the business and what it does: It can be quite simple to purchase shares purely based off figure statistics and previous business successes. However, it is also important to have a thorough understanding of the company and what it does, and what it plans to do in the future. This can have a significant impact on the future potential of that business. These future plans and goals can be potentially be found on the business’s website, where you will often find a white paper or road maps that indicates their future intentions.

Diversify your portfolio   If you’re considering investing in shares, you should ensure you have a good mix of other investment choices and assets in place already. A healthy diversification of shares can be a contributing factor to the success of your overall investment strategy.

Healthcare: The healthcare sector consists of stocks of companies involved in a range of health-related industries, including but not limited to pharmaceutical producers, healthcare service providers, medical devices, biotech stocks, and insurance companies. Examples of large healthcare companies include UnitedHealth Group (UNH) and Pfizer (PFE).

Materials: The materials sector includes businesses involved in the manufacture of construction materials, paper, glass and chemicals; companies specialising in making paper and forest products; and metals and mining companies. Some of the largest materials companies in the world include DuPont (DD) and The Sherwin-Williams Company (SHW).

Real estate: The real estate sector includes companies that develop or manage real estate property. This sector also includes real estate investment trusts (REITS), which are companies that purchase multiple income-producing assets, such as office buildings and hotels. Some of the largest real estate companies include American Tower Corp (AMT) and Simon Property Group (SPG).

Consumer staples: The consumer staples sector includes companies involved in food, beverage, and tobacco, as well as producers of household goods and personal products. Since these are goods and services that consumers need, regardless of their current financial condition, consumer staples are considered to be a defensive sector (i.e., recession-proof industries). The largest consumer staples companies include Walmart (WMT), Procter & Gamble (PG) and The Coca-Cola Company (KO).

Consumer discretionary: The consumer discretionary sector, also known as consumer cyclicals, includes companies involved in retail, e-commerce, luxury goods, and leisure and travel industries. In contrast to consumer staples, these goods and services are generally those that consumers don’t necessarily need to have. The largest consumer discretionary stocks include Amazon (AMZN), Tesla (TSLA) and Home Depot (HD).

Utilities: The utilities sector includes companies that provide customers with utility services, such as water, electricity and gas. Since utilities are considered to be essentials for daily living, the utilities sector is also generally seen as a defensive sector. Some of the largest utilities companies include AGL Energy Limited (AGL), Origin Energy Limited (ORG) and EnergyAustralia Holdings Limited (EAH).

Energy: The energy sector comprises businesses involved in the exploration, production, refining and sale of energy resources, including oil and natural gas, as well as companies that service these industries. The energy sector includes some of the largest energy companies in the world, such as Exxon Mobil (XOM) and Chevron (CVX).

Industrials: The industrials sector may include businesses that are involved in a wide range of industries, including industrial machinery construction and engineering, aerospace and defence, and electrical equipment. Some of the largest industrial companies in the world include Boeing (BA), Honeywell (HON), and Union Pacific (UNP).

Consumer services: The communication services sector includes telecommunication service providers, such as wireless telecom networks, media and entertainment companies, and newer interactive media and internet companies. Examples of large communication services companies include Alphabet (GOOG) and AT&T (T).

Financials: The financial sector includes a wide range of financial companies, including investment banks, commercial banks, insurance companies, asset management companies, financial brokers, and financial service providers. The financial sector includes some of the largest financial companies in the world like Visa (V), JPMorgan Chase (JPM), and Bank of America (BAC).

Technology: The technology sector includes multiple sub-sectors and industries, from semi-conductor producers to software and hardware providers, as well as internet stocks and cloud computing. The sector includes companies with some of the largest market capitalisations in the world, such as Apple (AAPL), Microsoft (MSFT) and Amazon (AMZN).