October 2001 Volume 82 Number 10 "serving the protectors"
Shares
By Ruth McCance, ASX Investor Education

How to select shares

People with a few hours per week to spend have the potential to make their own investment decisions, provided they are willing to do their own research, study company reports and read the financial media. However, it is generally advisable to obtain independent advice from a licensed professional advisor before making any investment decision.

While generally there is no right or wrong in investment, good timing and good share selection is usually crucial. There are two main approaches used by professional analysts - they are “fundamental analysis” and “technical analysis”.

Fundamental analysis involves analyzing the future growth prospects for that company over the medium to long term. Technical analysis focuses on the mood or trend of the market in respect to particular shares and aims to predict future share price movements in the short term.

The approach (or combination of approaches) that suits you best may depend on how long you intend to hold on to the share. For a medium- to long-term investment, the fundamental analysis of the long-term growth of the company may be of more significance than the current- and short-term price action in the market.

The majority of analyst reports you read will be based on fundamental analysis. This type of analysis generally focuses on:

• The “Story” - what the company does, what its outlook is, its competitive position etc.
• The “Numbers” - the financials of the company, balance sheet and ratio analysis.

These numbers can be obtained from a full-service stockbroker. Therefore, it may not be necessary for you to do the number crunching for every company. Your time could be spent developing the company story.

Sources of information are varied and include the company’s own reports, broker research reports and company announcements. This information can be obtained from a number of web sites, including www.asx.com.au and www.corporatefile.com.au.

Technical analysis is the study of past price movements of an individual share or market as a whole to gain an insight into where the price might go. It is a useful tool to help traders and investors time the entry into the market.

It can be used to complement fundamental analysis in the determination of optimal market entry and exit points. The principle tool for technical analysis is the chart. By representing past price movements, it provides analysts with an opportunity to identify trends upon which they can base their predictions of future movements.

Share selection is crucial, as it can determine your portfolio performance relative to the rest of the market. As written above, fundamental and technical analysis investment strategies are intended to stimulate thought on how you might select shares to meet your investment goals. Generally, market strategies seek to determine two major considerations. First, when to buy (invest) and, second, when to sell (divest). It is not until the point of sale that profit or loss is realized.

Australian Stock Exchange (ASX) conducts a range of courses, including analyzing and selecting shares. This particular course aims to assist you to understand how stockbrokers and analysts select shares, using fundamental and technical analysis. On completion of the courses, you should be able to undertake basic analysis and interpret broker research, in order to select shares for your portfolio. These courses are available in lecture series, self-learning and online formats. For more information, contact ASX customer service on 1 300 300 279 or visit www.asx.com.au

This article contains general information only. It is not intended as and must not be relied upon as investment advice. You should consult a licensed professional advisor prior to making any investment decision.

The information contained in this article is provided in good faith and derived from sources believed to be accurate as at the date of publication. However, no warranty of accuracy or reliability as to such information is given. Australian Stock Exchange Limited and its associated and related companies will not be liable for any loss or damage arising in any way from or in connection with anything provided in or omitted from this article or from any action taken or inaction in reliance on the article. This article does not contain an invitation or offer to invest in securities or other financial products and nothing in this article is to be taken as ASX endorsing promoting or expressing any opinion on any securities or other financial products.

©Australian Stock Exchange Limited ABN 98 008 624 691. All rights reserved.

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