I’d start investing by buying shares with these 3 characteristics

Christopher Ruane explains how he would start investing if he was beginning from scratch, using a trio of key principles to approach the stock market.

| More on:
Middle-aged Caucasian woman deep in thought while looking out of the window

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With thousands of companies listed on the UK and US stock markets alone, it can be hard to know where to start investing. How to find the right sorts of shares with no background in the market?

I would start investing the same way I would go on. Specifically, there are three characteristics I would look for when trying to find shares to buy.

1. Strong future business prospects

As Warren Buffett explains, buying a share is like buying a small stake in a business. So when investing, I look at the overall business and ask whether I think it has what it takes to do well in future.

Taking the long-term approach to investing, the future for me is not just coming years, but decades.

So I consider the possible size of a company’s target market, what competitive advantages it has, and how well its business model allows it to convert such advantages to profits.

2. Attractive valuation

Imagine you could buy, for £1,000, a business that earned £500 per year. After two years, you would already have paid for it (excluding any interest costs) and own it outright.

On paper, that business is selling for a price-to-earnings (P/E) ratio of two. That is low and sounds very cheap.

But then imagine I told you that business was £100,000 in debt. Suddenly, although the P/E ratio is the same, the value may looks much worse.

A great business can be a bad investment if one overpays for it.

When people start investing they sometimes focus too much on one valuation metric, like the P/E ratio. I would aim for a rounded approach to valuation – including always looking at a firm’s balance sheet.

Bigger may not be better, but it may be better monitored

Companies of all sizes and shapes can fail.

However, I prefer to invest in medium or large-sized companies than tiddlers. They have often had longer to prove their business model. A large listed company is also more likely to have institutional shareholders with big enough stakes to motivate them to keep management in check.

A tiny company often does not offer me that extra layer of reassurance, especially if its shareholders’ register is dominated by management.

Putting the theory into practice

From the moment I started investing, I would aim to diversify my portfolio across multiple companies.

Let me illustrate the above three principles by reference to a single share in my portfolio: ITV (LSE: ITV).

The audience for traditional television is in decline and I see that as a risk to sales and profits for the company. I also think it helps explain why ITV sells on a price-to-earnings ratio of 15, with a 6.6% yield to boot.

But traditional television remains a sizeable, though declining, business. ITV has been rapidly growing its digital footprint in recent years.

On top of that, a studios and production business means that the proliferation of viewing options seen in recent years has been monetised as a revenue stream for ITV rather than just being a risk.

I own ITV shares and would happily buy them if I was to start investing for the first time again.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has positions in ITV. The Motley Fool UK has recommended ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

2 industry-leading value stocks investors should consider buying

These value stocks are at the top of their respective industries, and look like current bargains with the potential to…

Read more »

Black father and two young daughters dancing at home
Investing Articles

Just released: our 3 top small-cap stocks to buy before August [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

If I’d put £5k in a FTSE 100 index fund 10 years ago, here’s what I’d have now!

Charlie Carman explores the performance of the FTSE 100 index over the past decade and the merits of passive versus…

Read more »

Investing Articles

£15K stashed away? I could turn that into a second income worth £49 a day!

This Fool explains how she would look to gain a second income through investing in UK stocks, and the steps…

Read more »

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

With the Apple share price near an all-time high, would I be crazy to buy more?

After touching all-time highs yesterday, the Apple share price is on a roll. But is there still enough growth ahead…

Read more »

Investing Articles

Nvidia stock has fallen 13% from its 52-week high! What next?

Our writer explains why Nvidia stock has dipped recently and highlights some risks associated with investing in the AI leader…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

The AstraZeneca share price is up 88% in 5 years, but is it just getting started?

The AstraZeneca share price has had a great few years, as acquisitions and clinical trials delighted shareholders. So is there…

Read more »

Investing Articles

Here’s why I’m watching the Anglo American share price

The mining sector has always interested investors. But after a flat few years, I'm wondering what's next for the Anglo…

Read more »