| Selecting
Investment Shares
With
the uncertainty around at the moment it is important to invest in
shares that are stable and producing an income to support their
prices if the overall market starts moving down.
We
want shares with good fundamentals and good technical structure.
We continually monitor the technical structure of the share as part
of our trading courses. Over the next few newsletters we will look
at how to find shares with good business fundamentals. I'm not talking
about reports, announcements etc. We are only interested in the
hard facts of the industry: size, assets, debt, earnings and
dividends.
The
fundamentals we want are:
-
A
stable company with a good business structure.
-
A
company with an earnings history that will support share prices
in the future.
-
A
company that is fairly priced.
-
A
company with acceptable debt that should not have financial
problems in the future.
-
A
company with good income stream from dividends.
-
A
company with tax effective income with franking.
Part
1: A stable company with a good business structure.
-
We
want companies of a reasonable size.
As a rule smaller companies are more vulnerable to
financial problems. However, I'm not suggesting that you just
buy 'blue chip' stocks. The growth potential is often better
in some of the smaller companies as long as our other selection
criteria are met. There are plenty of good companies in
the top 300 Australian shares. The company's size is indicated
by its market capitalisation which is the number of shares
multiplied by the price per share. This information is
available from the Shares magazine or the Financial Review.
-
We
want companies with a broad shareholder base.
Companies with a small, tight shareholder base are
susceptible to sudden unexpected price movements. The price
movement of companies with a large diverse shareholder base
is influenced by investors and traders with different expectations
and trading requirements. You can have traders selling to take
a profit and at the same time long term investors are buying
for the dividends and long term capital growth. This type of
diversity stabilises prices and makes them less erratic.We can
manage our risk easier when share prices are moving in a more
consistent manner.
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