How To Invest In Shares

Published on:

May 27, 2010

8. Finding Companies To Invest In

Selecting an investment strategy is the relatively easy bit of learning to invest. Now comes the hard part! Putting the strategy into practice and finding the companies that satisfy your chosen guidelines.

This section is all about how you can use the resources around you to find companies worth considering investing in. Initially you may need to cast your net quite widely and try to come up with a list of potential investments that might fit with your investment strategy. Once you have your list of potential investments, you'll need to find out more about these companies, and then, after much thought and consideration, select one or more -- or even none -- of these companies in which to invest your hard-earned money.

So how do you find companies that will suit your investing style and your investment strategy? For many, the fun of investing is finding that golden nugget of a company, the company that no else has noticed and which ultimately proves to be a very shrewd investment. But finding the right company to invest in is the most difficult thing to do for investors. The London stock market has thousands of companies listed. In Europe there are many thousands more. And if you look at all of the world's stock markets... well, you'll soon find that you can't see the wood for the trees. Selecting suitable companies can become all but impossible.

The art of investment is to narrow your search down to a few companies that you can study and follow, and, based on the information you discover about them, you can then make better informed investment decisions.

How do you find potential investments?

If you have had some personal experience of a company, if you work for them, or are a customer of theirs, then you are in a perfect position to assess the quality of that business. But always be wary about personal experience. The investment world is littered with companies that may be great to work for, that give excellent customer service and have great products, but if they don't make a profit and they don't generate cash, then they might not be the best investment.

But if you really want to find potential investment opportunities, you need to be proactive. It is no use waiting around hoping that your next investment is going to come along and slap you in the face. The only way to find good investment opportunities do it is to go out and look for ideas. And that means you need to do your own research.

Read, read, and read some more

The most important way to find suitable investments is to read. Read everything that comes your way. Buy the Financial Times, read the Investors Chronicle and -- of course -- read the Motley Fool! Consider signing up to the Motley Fool's flagship share recommendation service, Share Advisor.

Read as much as you can about companies and investments. Every time you read about a company, mentally run it past your 'stock screen' in your brain. Ask youself "does this company qualify as a potential investment against the criteria I have set in my investment strategy?". If it does, note it down for further research. If it doesn't, then forget about it immediately.

Some of the best sources for investment ideas are available on the Internet. We list a few here, but there are many, many more.

The Financial Times is pretty much essential reading for anyone serious about taking control of their own investments. When you first buy the FT you may feel a bit intimidated, but don't worry, it really isn't as dry as it may look. The FT covers company news in more detail than any other newspaper and the Lex column is excellent.

For those starting out, the weekend edition of the FT is a much lighter read. It contains a good personal finance section and an informative stock market review of the week. The Weekend FT also highlights directors' dealings, where heavy "insider" buying or selling could prove to be an investment indicator.

A subscription to the online edition of the FT is well worth considering. It means you can read the Lex column on the day it's written, not the morning after. Even better, you can read articles from the FT archive and other publications too.

Stock screeners

An excellent product for the really serious investor is Company REFS (Really Essential Financial Statistics). It's essentially a database that gives a snapshot of every quoted company, detailing amongst other things, past financial records, various performance ratios and future profit estimates. Although REFS is published monthly in Yellow Pages-sized volumes, perhaps the best medium to receive the product is via a CD. The CD allows the excellent facility of setting up personal search criteria (eg: low price to earnings ratios, high dividend yields) to present a list of suitable companies. You can also use REFS online

The main drawback with REFS is that it is expensive (at the time of writing around £800 a year for the CD or full online access, although 'weekends only' online access is much cheaper), but if you are a serious investor, it's well worth considering. Cheaper sites, popular with many people on our discussion boards, include Sharelock Holmes and It Pays Dividends.

Stock screeners can save you a lot of legwork but it's best to never rely on them completely for financial information. In practice, most people use them to draw up a shortlist of possible candidates, but then double-check the key information for each company using their annual accounts or results statements.

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