Selecting shares to invest in – 5 key considerations

Many Australians are turning to growth assets in order to chase better returns than those offered by the banks. With thousands of shares listed on the stock exchange, what do savvy investors take into account when deciding which ones to buy? Let’s look at five key considerations.

1. Is the company growing its profits?

In very simple terms, the value of a company can be calculated by adding together all of its future profits. All else being equal, a company that consistently grows its revenue year on year will increase in value more quickly than a company with slower profit growth.

2. How big is the company?

Big companies may dominate their markets, reducing their potential for future growth. Companies with a smaller market capitalisation (share price multiplied by the number of shares on issue) may be younger and expanding into new markets and industries that support more rapid growth. However, the share price of smaller companies may be more volatile. That can be attractive to investors who use periods of share price weakness to top up their holdings, but less attractive to investors wanting more stability.

3. How much debt does the company carry?

If a company is paying lots of interest, then there’s less cash available to pay dividends and to invest back into the company’s core business. While a company may be able to use debt to grow, in periods of market turmoil highly indebted companies are more likely to see their share price come under pressure than their less indebted counterparts.

4. What does the company do with its profits?

There are two things that a company can do with its profits. It can re-invest them back into the business, to boost its growth. Or it can pay dividends to its shareholders. Whether it’s best to opt for a high dividend low growth company, or a low dividend high growth one depends on individual requirements. Many investors depend on dividends for their day-to-day income. Others prefer to forgo annually taxable dividends in favour of capital growth that is only taxed – often at a discounted rate – when the profits are realised.

5. Does a new share compliment currently held shares?

The most basic risk management tool in an investor’s toolbox is diversification. Buying shares in a big bank won’t provide much of a diversification benefit if the portfolio already holds lots of shares in other big banks. Mixing financials with resource, biotech or industrial shares will deliver better diversification.

There isn’t one single magic rule to building a share portfolio. A lot depends on the goals and circumstances of the individual investor, their attitude to risk, and prevailing market and economic conditions.

The good news is, your financial advisor is always there to help make the most informed decision for your particular situation.

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General Advice Disclaimer

This article contains general advice only, which has been prepared without taking into account the objectives, financial situation or needs of any person. You should, therefore, consider the appropriateness of the information in light of your own objectives, financial situation or needs and read all relevant Product Disclosure Statements before acting on the information. Whilst every care has been taken to ensure the accuracy of the material, Paradigm Strategic Planning or Sentry Advice Pty Ltd will not bear responsibility or liability for any action taken by any person, persons or organisation on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organisation should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action.

Paradigm Strategic Planning Pty Ltd is an Authorised Representative of Sentry Advice Pty Ltd AFSL 227748

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