Buying stocks and shares

I have up to now, avoided buying shares, due mainly to ignorance of how to value individual companies and what factors to look for when determining an undervalued or overvalued company share. When people mention equities I naturally think of investing in single companies but are there different types of equity investments that are lower risk? Also, what determines the price of a particular share as shares seem to go up and down daily?

Equities form the core of almost all investment portfolios that are designed for the medium to long term. It is only the very cautious investor who should not have at least some element of equity exposure. Such a person would therefore have his savings in a bank account. Equity investments generally take two forms - directly, as you say, by way of the purchase of shares in quoted companies on the local or international stock market, or indirectly, through pooled investments such as collective investment schemes either listed in Malta or abroad.

Collective investment schemes (or funds as they are more commonly known) may contain hundreds of different shares within the one fund, therefore drastically reducing the risk of any one share getting into difficulty. The average investor should therefore be encouraged to opt for this option unless they are prepared to monitor share prices minute by minute.

People buy shares on the expectation of capital growth and possibly to also receive an income from them in the form of a dividend. They hope that rising company profits will lead to increasing dividends and/or growth in the capital value of the shares. The price that a share trades at also depends on the supply and demand for it. There are many factors that affect investor demand for a particular share which in turn determines the price.

A company may be considered a takeover target. This would likely boost the share price at least in the short term.

A company may increase or reduce its dividend. Dividends normally follow the trend of profits and an unexpected reduction in dividend is likely to lead to a significant fall in the share price.

There may be a general optimism (or pessimism) about a particular economy or market, such as the banking sector or the state of the American economy.

There may be the expectation of a company's profits going up (or down). Investors usually try to take into account long-term trends and a current share price may therefore already reflect investors' views of how well the company is expected to perform in several years' time.

Equities have proved a good long-term hedge against inflation throughout most of the last century, especially when compared with cash and fixed interest (bond) alternatives. There have been spectacular fluctuations in capital values over the shorter term, which is why investors should regard equities as an investment with a time horizon of at least five years.

Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 or e-mail mh@hollingsworth-int.com, www.hollingsworth.eu.com

Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.