How to choose shares to buy

The single most common question I am asked by the general public is, “What is a good share to buy?” Although this is a fair question. The assumption is that knowing what share to buy is the key to successful investing in the stock market. And here lies the problem. All of your focus is on the company. And rarely does the investor consider strategy alternatives, position management plan, or portfolio money management.

How to choose shares to buy

Last week I discussed the US government shutdown. And what our expectations are for the US stock market. Government workers are yet to go back to work. But we were correct in expecting the stock market to waver during this period. It has retraced for the last few sessions.

But now, the stock market is at an attractive level. And once the government re-opens its doors and millions of American’s start receiving pay cheques again. Investors will see this as an opportunity to buy undervalued companies at a discount price.

Making decision on what shares to buy

The average punter is searching for a good company at a cheap price. With the assumption that it will rise in value over time. This is as simple as it gets. And for those who are more knowledgeable, they have a greater potential of choosing stocks to buy more wisely. Or so they would like you to think.

My 15 years experience in the markets has defined a few key points about investing:

  1. Stock market activity is completely efficient. All information is reflected in the prices of shares, including expectations, sentiment, political, economic and fundamental.
  2. Prices of shares reflect expectations of company fundamentals 6-months down the track
  3. Success in investing is about strategy and money management.

The Risk of investing is that share prices will fall. So if you know how to invest in the markets and adopt Risk management strategies, where you can protect or hedge against falling prices, then you have a great probability of outperforming the markets.

So what shares to buy?

You could jump out and buy the standard Blue Chip stocks, which are perceived to be Oversold at the moment. Any broader market recovery will be driven by investors entering the market at these levels, so it is a reasonable assumption to expect the Blue Chips to rise on the short to medium term.

The Blue Chip stocks have their own individual company Risk that the investor must consider, such as geopolitical pressures, commodity prices, economic data and general market sentiment. Buying stock requires a sizeable amount of capital, and diversification is a key method of reducing Risk.

Buy a listed Fund, not a Blue Chip

An alternative to buying Blue Chips is to purchase an Exchange Traded Fund (ETF). In our article published 25th October 2012, ETFs The Way of the Future, we discuss the advantages of this modern method of investment.

ETF’s on the Australian market are only young, but liquidity is improving year after year. The S&P/ASX 200 Fund (Code: STW) provides exposure to the ASX200 list of companies, but through buying just the one listed stock: STW. The Fund pays a dividend, and reduces individual company Risk. If a company is no longer in the top 200, then it is removed and replaced. Hence, an individual stock falling might influence STW on the short-term, but not over the long-term.

Protect with Options

The derivatives market might seem confusing to the average investor, but if you find the right advisor, your investment portfolio will be introduced to a whole other level of strategy choices. Using the Option derivatives provides an investor the ability to hedge their portfolio, protect an individual stock position, or to capitalize on price differentiations due to Volatility or various Time components.

In fact, having used Options for more than a decade, I would not take on a new client without first discussing what their intentions for investment are, and explaining how we can manage Risk with Options. At a time when the stock market is proving a little difficult in defining an expectation over the coming months, Options are proving to be essential in outperforming the markets.

How to choose shares to buy is an open ended topic at the best of times, let alone when we have a sizeable pullback in the markets and the headlines all touting Doom & Gloom over the US budget and Debt Ceiling.

As a professional, I won’t panic over the headlines knowing that I have choices in how to manage a portfolio, or even simply closing stock positions until the dust settles. But by choosing other methods of stock market investment, I can establish a lower Risk investment portfolio.

It’s not choosing which shares to buy that makes you successful in the stock market, it’s how you manage your Risk that is the key.

Learn More

If you would like to learn more about Stocks, Register your Interest for our Stock Selection Course

Matthew Brown – US Stocks & Options specialist
US Equity & Option Client Advisor
Halifax Investment Services
ASIC Australian Financial Services License Number – 225973

If you would like to learn more about the strategies you can use to profit from any type of market direction, visit https://australianinve.wpengine.com or you can contact Matthew on brown@halifaxonline.com.au
Matthew is an Authorised Representative of Halifax Investment Services (Halifax). Halifax provides broker services, including Full Service and Discount Services using multiple trading platforms. For Discount platform services, Halifax charges the same fees for phone service as the online trading platform.

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