Personal Finance: Do Your Spadework before Taking the Plunge ; Don't Invest on a Whim and a Prayer. A Thorough Evaluation of Markets, Industries and Companies Will Give You a Far Better Chance of Maximising Your Returns and Minimising Your Risks, Says John Andrew
Andrew, John, The Independent (London, England)
I well remember listening to a retired bank manager reminiscing about the technique of one investor at his small branch during the 1960s: "I read out the names of shares that were priced at a few pence and he bought them if he liked the sound of their name". So "penny shares" were being bought on a whim.
When ProShare, the organisation that promotes share-based investment, commissioned research into how investors decide what shares to buy, this strategy thankfully did not surface. MORI Financial Services did the research by interviewing shareholders who actively trade.
The findings were interesting. Of all those interviewed, 65 per cent used newspapers and magazines as a source; 37 per cent friends, family and colleagues; 28 per cent the share issuer's own information and 24 per cent TV programmes. Research prepared by analysts was not a response.
This is hardly surprising as investment banks and stockbrokers provide this for institutional investors such as pension funds and insurance companies. The recommendations may eventually appear in the press as tips and informed comment.
So what is research? Trained individuals who study companies and markets prepare it. They examine statistics and other information regarding past, present and future trends or performance. Their reports give recommendations on which shares to buy and sell.
It helps investors make investment decisions as it gives an insight into markets, industries and specific companies. Every investor's objective is to maximise their return and to minimise their exposure to risk. Reading and digesting investment research - whether about a particular market, industry or company - helps achieve this.
Research may be used in two ways. The first is a top-down approach whereby the investor evaluates a market, then chooses an industry and finally a specific company within that market. The second is the bottom-up approach. Here the investor selects a company and confirms his or her findings by evaluating the company's sector and then its market.
Analysts use two approaches in their reports. Focusing on factors such as past and projected performance and the quality of a company's management is known as fundamental analysis. The other, known as technical analysis, is when they examine the performance of a company's shares and the pattern of past stock price movements. …