Stocks & Shares

Stocks & Shares or Equities all refer to the same thing, the buying of shares in the ownership of a company.

This is a very high risk strategy, as individual companies can go bust, in which case you'll lose your entire investment, but conversely you can also make much better returns than the market if you choose a company well. The way to reduce your risk is to buy shares in lots of different companies but if you do this, unless you're committing a lot of money to shares, it would be cheaper to buy funds (unit trusts or investment trusts) as they can reduce the purchase and sale costs due to buying in bulk volume.

People who do buy individual stocks tend to either look for growth (companies where they expect the company to grow rapidly and the stock price to reflect this) or income (companies that have a tendency to pay out a substantial proportion of their profits to shareholders in what's known as dividends).

Companies which usually grow rapidly are small and medium sized companies with growth tailing off the larger a company becomes. The stock market for small to medium sized companies is called the Alternative Investment Market (AIM). However, as most brokers (companies that help you buy and sell shares) just focus on the FTSE, a lot of small to medium sized enterprises (SMES) will list themselves on that market themselves.

People who invest in individual shares tend to do a lot of research in to the strength and potential growth of the company by examining the company's balance sheets (accounts) which will be available on the company's website, if it's a public company (a company listed on the stock market - AIM or FTSE). It's quite difficult to read all of the balance sheets of all of the companies who you may want to invest in, so there are sites which help.

Yahoo Finance http://uk.finance.yahoo.com/ is one of the best sites if you're interested in investing in stocks and shares or funds. What it will detail for an individual company includes:-

Open(ing price) - this is the stock price when the market opened today

Bid (price) - this is the price that you can currently sell your stock back to the market at.

Ask (price) - this is the current price that you can buy stock in a company from the market

1y Target Est(imate) - this is the estimate from a group of analysts as to what the market price will be in a year's time. Take this with a pinch of salt. Analysts are often paid by companies to give them favourable prices/forecasts.

Day's range - minimum and maximum price during the day. Generally, of interest only to day traders (people who buy and sell stock within a single day) rather than buy and hold investors (people who buy stock and hold on to it for months/years).

52w(ee)k range - minimum and maximum price over rolling year period. Generally of interest to buy and hold investors.

Volume - the number of shares traded during the day. By comparing with the Average Volume, day traders can tell if a company's hot or not at the moment.

Avg Volume - the average number of shares traded per day.

Market Cap(italisation) - this is the number of shares * current share price. This tells you how much the market currently values the company and can be used to compare with the revenue/profit/net assets. You can then decide if the market's undervaluing or overvaluing the company.

P(rice)/E(arnings) ratio - This is simple measure of how the market's currently valuing the company. The Price is the current stock market price for this company, and the earnings is the last year's profits which were distributed to shareholders. Typically, fast growing companies will have a high P/E ratio, as the market expects earnings to grow rapidly and as the earnings refers to the previous year's earning, it's current earnings will be much higher. Investors looking for growth will typically look for company's which they believe will increase earnings rapidly and whose P/E ratio is lower than what would be expected.

E(arnings) P(er) S(hare): This is a division of the company's last year's profits distributed to shareholders by the number of shares that have been sold in that company. This tells you how much you would have earned per share had you held the shares last year. This is of interest to income investors i.e. people who want a good rate of income (analogous to interest) from their investment. Typically large organisations e.g. banks/oil companies will have relatively little potential for growth so will distribute a greater proportion of their profits to shareholders than SMEs who will instead invest the money to grow the company.

Div(idend) & Yield: The Yield is analagous to the interest rate and is given as a percentage of the earnings/market cap.

There are also analyst's forecasts (which should be taken with a pinch of salt). The next year's revenue is of interest if you don't want to read the current year's revenue listed in the company's accounts. This tells you how much the company earned in sales. For mature organisations you can divide the profits by the revenue and compare with similar organisations. Companies that differentiate from the norm could highlight a need for further investigation. The expected net debts are also of interest. A company could have substantial revenues and large profits but if it's net debts are very large, there could be trouble ahead if the rate of interest charged on the debt goes up, for example e.g. Lehman brothers.

In the old days, brokers and individual investors spent a large amount of time poring through company's facts and figures to try to determine which companies were the best to invest in.
In my honest opinion, this is quite pointless nowadays, if it wasn't back then. A company's price on the market does not correlate with it's underlying value in the short and medium term, and since investors in company's shares include pension funds, unit & investment trusts, derivatives and a lot of people who don't bother doing any research at all, it seems to me at least to be more speculation than investment nowadays.