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32 marketthe market 33the

only provide a picture of the company

as it stands at the end of the companys

nancial year. Quoted companies are

also obliged to produce half yearly and

quarterly results as well; these are worth

looking at too. The key nancial reports

are: the balance sheet which records what

a company owes or is owed, and how

much cash it had in the bank at the end

of the period; the prot and loss account

or income statement, which shows how

much money it earned and spent in its

activities; and the cash ow statement,

which shows what the company did with

its cash during the year.

Reading and understanding financial

statements takes time and practice.

As with most matters connected

with financial services, when

you invest in stocks and

shares you find that relatively simple

concepts are wrapped up in jargon

that seems designed to cloud and

confuse. A good lesson to take on

board therefore, is not to invest in

anything you do not understand, or

which has not been properly explained

to you. However, at the same time,

it is important to make the effort to

get to know the language and do the

research, in order to be well enough

informed, to be able to make an

investment decision.

Companies quoted on the stock

exchange are broadly grouped

together for ease of reference and

comparison. For example, health care,

industrials, oil & gas and utilities,

among others. If we take a look at the

banking sector, it does not take long

to figure out which of the major high

street banks shares are worth more

and which pay dividends.

But share prices are just the tip of the

iceberg. Unless we are going to take a

complete shot in the dark we need to

reach an understanding of the company

we are considering investing in. First

stop is the companys annual report.

These are mines of information about

what companies do, where, how and

why they do it. Bear in mind that they

ii101

At close the FTSE was up 100 points on the

day. Blue chips held up well despite prot taking

and gilts taking a bashing. Any the wiser?

Stock market

P 2

However, looked at in conjunction

with the written statements in the

annual report and especially the

notes to the accounts, it should not

take too long to figure out what the

company does and how it is faring.

Remember that apart from being a

document required by law, an annual

report is also a sales document for

the company. For this reason it

should only ever be one source for

our research, especially as it is largely

backward looking and therefore out of

date by the time it is produced.

Fortunately there is a vast amount of

other information available in print

and online such as, Interactive Investor

Bank

Barclays

HSBC

Lloyds

RBS

Marketcapitalisation*

34.34 bn

115.04 bn

47.83 bn

26.90 bn

Share price(in pence)

285.45

663.3

71.64

46.4

Price/earnings ratio

10.56

20.36

n/a

n/a

Earningsper share

26.99

32.08

-7.65

-3.04

Dividend pershare (in pence)

4.5

34

Nil

Nil

Hih p

Courtesy o the FT.comSaturday 16th October 2010

* The number o shares in issue multiplied by the price o the shares

It does not take long tofIgure out tHe major HIgH

street bankswHose sHaresare wortH more and wHIcH

Pay dIvIdends.

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34 marketthe market 35the

www.iii.co.uk, Citywire www.citywire.

co.uk, Financial Times www.ft.com and

a great many others whose job it is to

generate new stories about companies.

There is also a lot of research produced

by stockbrokers, rating agencies and

banks; all useful as sources to a greater

or lesser degree. However, all should be

treated with scepticism because none ofthem get all of it right all of the time and

usually they have some kind of agenda.

But if you research enough, and keep

up-to-date with the latest news on the

companies you are interested in, you will

be in a better position to decide what is

in your best interest as an investor.

Reading through the research, some

terms and ratios come up repeatedly.

What do they mean? Earnings per

share (EPS) is a common one. It is

arrived at by dividing the net profit,

the bottom line shown in the profit

and loss account, by the number

of shares in issue. This indicates

how much money the company is

generating for its shareholders.

Price/earnings ratio or PE, another

measure, is arrived at by dividing the

current price of the share by the EPS.

This number, also referred to as the

multiple of earnings, alongside EPS, is

useful to compare with those of other

companies to see which is producing

the best result for the investor.

This does not mean that companies

with low EPSs or PEs are necessarily

.xh..hpi...ih..

..

Share price inormation is availableonline at web sites such as:

j

ProfIttakIng

When a share price has risen

consistently or a period o time

investors may decide to sell

and take their prot rather than

hang on to see i the price

will go any high er.

bluecHIPs

Large, well known and well

perorming companies whose

shares are regarded as high

quality investments in stock

market terms.

ftse 100An index o the 100 largest companies

quoted on the London Stock

Exchange. It started at a base o

1,000 at the end o 1983. Increases

or decreases in the index refect the

movements in the prices o the shares

o those 100 companies. There are a

variety o other FTSE indices, see here:

www.tse.com/Indices/index.jsp

tHeclose

The London Stock Exchange

opens or dealing at 08:00

and closes at 16:30 every

day o the week except

Saturdays, Sundays and

public holidays.

gIltsUK Government

bonds or gilt-edged

stocks issued by

the Government

to raise money.

bad investments. Perhaps they have

room for growth, perhaps companies

in their sector tend to have low EPS

and PE ratios. If the PE is very high

it suggests that the companys shares

are expensive, some hi-tech stocks are

like this, but their potential for growth

may be very great, like a Google or an

Apple for example.

There is no substitute for getting to

know a company, its products, how

it conducts itself, whether it values

shareholders, how it behaves towards

its other stakeholders, whether it

pays its management in proportion to

their abilities and what its strengths,

weaknesses, opportunities and

threats are. But, other important

considerations are things like the state

of the economy as a whole, inflation,

unemployment and, if they buy or sell

goods or materials abroad, the effect

that exchange rates may have on their

costs or revenues.

For example, if you were to look at a

graph of the share price for just about

any company quoted on the London

Stock Exchange covering the last five

years, in almost every case you would

notice a massive price fall following

the collapse of Lehman Brothers, the

New York investment bank, on 16th

September 2008. It was a moment of

panic in the financial markets when

investors sold their shares to salvage

their cash. Fortunately disasters of

this sort do not happen too often, but

this example does show how factors

outside a business can radically

affect its share price. No company

is an island. All companies ply their

trade within local, national and

international economies, which affect

them for better or for worse.

The same approach should be taken

with all companies; do your research.

Spend time studying the investment

opportunity until you understand

it and feel confident that you have

reviewed as far as possible the risks

involved and whether or not the likely

return is fair compensation for taking

that risk. No one can read the future

with any great degree of certainty.

So at times, as with any investment,

even leaving your money with the

building society, you have to make

your decision. Because stuffing your

cash under your mattress is probably

not a worthwhile option!

no comPany Is an Island. allcomPanIes Ply tHeIr trade

wItHIn local,natIonal andInternatIonal economIes,wHIcH affect tHem forbetter or for worse.