Deciding what shares to buy

If everyone knew which companies would do well, we would all be millionaires. The kind of stock you should invest in may depend on many factors.

It is important to invest in a way that is consistent with your investment goals and investment personality. Your portfolio should be made up of shares that can attain the performance goals that you set for the shares in your portfolio.

Let's now take a look at the types of shares you may come across in the market, based on factors such as return, value, growth potential and risk.

Income shares

As the name suggests, these shares provide steady income streams for investors where companies pay regular dividends compared to others. When buying these shares the important considerations are, the tax applicable on the dividend and the cost of the shares in comparison to the net dividend paid.

Value shares

Value shares reflect established companies with highly successful businesses and a strong financial position. Investors tend to think of value shares as bargains as they appear inexpensive relative to the earnings of the company and other fundamental factors. Value shares tend to have low price-to-earnings ratios and high dividend yields.

Long-term investors prefer these shares which they often hold over long periods, until the true value of the share begins to emerge in the form of dividends or an increase in the price of the share.

Growth shares

Growth shares generally represent companies that have a strong and substantial growth potential. Generally, the progression of these companies is in line with the country's economic growth. A growth company reinvests in various projects which can facilitate further growth.

Thus, it typically pays little to no dividends to shareholders. Investors who invest in these shares devote their current income expecting to receive high returns at a later date.

Cyclical shares

Shares which follow general economic trends and business cycles fall into this category. These shares are issued by companies which are sensitive to business cycles and whose performance is closely tied to general economic trends. Prices of cyclical shares can be volatile as they follow market expectations of how the general economy would perform or other conditions.

For example, during bad weather phases, the production in the plantation sector decreases and the off-season in the tourism sector generates less income in the hotel industry. Based on such factors the value of shares may rise or fall.

Defensive shares

These are shares that remain stable even under strained economic cycles. Unlike cyclical shares these are not affected by general economic trends. During all phases of the economy, whether it is recession or expansion, companies that provide essentials needed by consumers such as food, fuel, gas and medicine are likely to remain stable.

Selecting shares

The advice of an investment professional will help identify the share types discussed. If you want to go at it alone, educate yourself further using CSE publications or resources on the CSE Educational Portal online.

You can also use the following as sources for information: Stockbroker websites and publications, newspapers and business magazines, business programs on TV and radio, websites and publications of data vendors such as Reuters, Bloomberg and Telekurs.

Companies listed on the CSE are categorised into 10 different sectors, which are further classified into 21 additional industry groups. After having identified which type of share and industry you would buy, you can go on to individual share selection.

When considering buying shares in a particular company, you must first do research on that company. As we stated in the column two weeks ago, talk to your adviser and or do your own research that can give you a good understanding of the company's activities and its business situation.

Be wary of speculative shares

When you explore the market and do research for share selection, be wary of companies which lack financial stability or a good track record in earnings and dividends but appear to be focused on delivering growth fast. If a company's publicised future growth is not supported by fundamentals, it can be classified as a high risk investment.