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How to pick a stock

26 April 2014
3 minute read


So you have decided you want to invest on the JSE and you have appointed a stockbroker to manage your trading. Your next step is to decide which shares to buy. If like most people, you are serious about your money, this is what you need to consider.

What do you want?
The type of stock you choose depends on whether you are looking for regular income or long-term capital growth. If you want regular pay-outs, choose income stocks, which pay dividends to shareholders. (Dividends are sums of money paid out to shareholders twice a year based on the company’s profits.) On the other hand, if you want to grow your capital investment over the long-term, choose growth stocks. These are typically companies that are just starting out or are starting to grow substantially and want to invest profits back into the company as opposed to paying dividends. The advantage to the shareholder is that as the company grows, the value of the stock increases and this in turn, grows your capital investment.

You may also have ethical beliefs that you don’t want to compromise, which will rule out certain stocks. For example, Shari’ah investors will not invest in any companies that own casinos or tobacco companies as this goes against the Muslim religious beliefs. Or you might not want to invest in companies that test their products on animals or use child labour.

Look for non-cyclical stocksDifferent industries go through cycles. For example, the mining industry carries some uncertainty due to frequent labour strikes. Another example is construction companies, which typically go through a slump when the economy falls and building confidence is low. Asset managers often include “non-cyclical stocks” such as Pick ‘n Pay in their investment portfolios. Because Pick ‘n Pay specialises in grocery stores, demand for the company’s goods is constant and does not depend on market cycles. Another company that qualifies as a non-cyclical stock would be telecommunications company MTN.

Buy low, sell highThis is the golden rule of investing. Don’t read newspaper headlines and panic when they say “the market is crashing”. That is usually the best time to buy stocks because prices drop. Unfortunately, investors tend to panic and think that they are saving money by selling stocks when markets crash. You should either be buying during a crash, or if you are already invested, biding your time and riding out the market movements instead of selling.

Research the companies you want to invest inAll listed companies have to publish their annual financial statements. They also have to issue trading statements when there is going to be a change in the company that may affect the company financially. These documents are freely available on their websites. Before you buy a stock, find out as much as you can about the company. What is their history? Who are their directors and what is their experience? How many competitors do they have and what is their market share?

Balance your portfolio
Always invest in diverse stocks so that your investment portfolio is balanced. For example, don’t plough all your money into telecommunications stocks because “it’s a sure thing”. If, for whatever reason, the telecommunication industry goes through a slump, your portfolio should be able to recover the money elsewhere. If you are also invested in property stocks that do extremely well at the same time, then you are better protected from the loss due to the telecommunications stocks.

Investing directly on the stock market can be cheaper than investing via a unit trust but if you don’t weigh your decisions carefully and make them with a clear head, it could cost you more in the long run.

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