HOW

TO PICK
SHARES
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IMPORTANT INFORMATION
We’ve written this guide to give you useful information about picking shares, but it doesn’t
include any personal advice or recommendations to buy, sell or hold any investment.
Share prices will go up and down in value, so you could make a loss, and share income can
also vary. Past performance is not a guide to future returns. Yields are based on past income,
which means they aren’t a guide to the income you’ll receive in future. If you’re not sure
whether a share is right for your circumstances, please seek personal advice.
When buying shares please be aware that on a rare occasions shares can be delisted
from the stock market, without warning. If this happens it may be difficult and costly,
or even impossible, to sell your shares.
The information in this guide was correct as at 26 September 2019.
THREE WAYS TO PICK SHARES
Easy methods anyone can use.

Anyone can buy shares. You don’t need to

be rich, famous or have a maths PhD. But how
do people decide which shares to buy?
In this guide we look at three easy methods.

1. LOOK AT THE ECONOMY – PAGE 4

How to use the economic cycle to decide
which shares to buy. Learn to identify ‘cyclical’
companies, whose fortunes are closely linked
to economic growth, and ‘defensives’, which
have the potential to thrive in tougher times.

2. USE LONG-TERM THEMES – PAGE 7

If you can spot how the world is changing and
identify the companies best-placed to take
advantage, this can be a great way to invest.

3. BRANDS YOU KNOW AND LOVE – PAGE 9

How you could use your everyday experiences
as a consumer to spot potential winners and
losers in the stock market.

PLUS – PAGE 10
A brief guide to researching companies, and a
short glossary of terms you should know.

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 LOOK AT THE ECONOMY
Use the economic cycle to help choose shares.
Over time the global economy will grow and
shrink. This cycle is natural and it has taken
place throughout history.
When the economy is growing strongly, people
are typically optimistic. They often have more
money and are happy to spend it. But when
times are tough, people tend to tighten their
belts. They may forego luxury treats, the family
holiday or hold off buying a new car.
You can keep an eye on this cycle, and use its
ups and downs to pick which shares you buy
at which time.
DEFENSIVE SHARES
You can think of defensive shares as ‘steady-
eddies’. They may not grow as fast during the
boom times, but they also haven’t struggled
to the same extent in tougher times. That’s
because companies with defensive shares sell
things or provide services that people need
and use, no matter what the economy’s doing.
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A great example of a defensive area of the
market is pharmaceuticals. Even when the
economy isn’t doing so well, people and
governments still need to spend money
on medicines.
They’re called defensives because they can be
a potential line of defence when stock markets
are falling. Of course, no company can be
completely recession-proof. And defensive
companies can still fall in value.
For example supermarkets are seen as
defensive - people need to eat, even during
a recession. But you could also switch to a
cheaper supermarket or different brands
of food and drink.
Tip: Think about the products and
services you’d buy even in tougher
times – the companies selling them
are probably ‘defensives’.
When the economy is
growing strongly, people
are typically optimistic.

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 THREE THINGS TO LOOK FOR IN A THREE THINGS TO LOOK FOR IN A
GOOD DEFENSIVE SHARE: GOOD CYCLICAL SHARE:
1. The company’s earnings are relatively 1. The company has little or no debt.
predictable – it’s a profitable company
2. When there are downturns, the company
with good returns.
can anticipate or react quickly to them.
2. T
 he goods or services the company sells
3. In the good times, the company doesn’t
are always in demand, preferably across a
over-expand.
number of different countries.
3. The company pays a healthy dividend MAJOR CYCLICAL AND
to shareholders – paying out profits as a DEFENSIVE SECTORS
dividend shows the people who run the
company are confident the company will
Cyclical sectors Defensive sectors
continue to make profits in future.
Aerospace Food
CYCLICAL SHARES
Cyclical shares typically mirror the health of Automotive Beverages
the economy. Profits and dividends rise during
Banks Healthcare
the good times, but suffer during slumps.
Construction Household goods
It’s difficult to judge when the market has hit
the bottom. But if you buy at the start of an Engineering and Industrials Life insurance
upturn, you could get in before things heat up. Media Pharmaceuticals

Bear in mind not all cyclical shares are hit at Manufacturing Support Services
the same time. For instance in a recession,
Mining Tobacco
we spend less and retailers feel the effect
immediately. Suppliers and distributors then Property Water
feel the knock-on effect as the shops reduce
their orders. However, makers of components Retailing
and producers of raw materials come into the
Travel & Leisure
cycle last.

Tip: Cyclical shares have often performed

well when the economy is growing strongly.
But during a downturn, defensive shares
have tended to do better.

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THINK LONG-TERM
How will the world change over the
next 10 or 20 years? And which companies
will benefit most from those changes?
If you can anticipate future needs and
changes, and invest in shares accordingly, HERE ARE THREE BIG THEMES TO
it’s possible to make good profits. But of GET YOU STARTED:
course there are no guarantees. Shares will
rise and fall in value. TECHNOLOGY
• Will there be a continued shift to
An example of a big theme is the growing online services and products?
middle-class in countries like India. As peoples’ • How will our need for cybersecurity
wealth increases, they usually spend more drive innovation?
too. And the companies that benefit most are • Is wearable technology a
usually those selling luxury goods, technology, growing market?
cars, wines and other similar items.
RISING HEALTHCARE SPENDING
Of course, there’s an element of guesswork • People living longer in developed
with predictions like these. If you get it right, countries – how will this affect their
you could benefit for decades. But buying needs and which companies will
into a big theme is no guarantee of success. meet those needs?
Some companies will thrive, while others • Growing middle-class consumers
won’t. Remember, for every Netflix there’s a in emerging markets – who needs
Blockbuster, and for every iPhone®* there’s what level of care, and who
a Blackberry. provides it?

* iPhone is a trademark of Apple Inc., registered in

CLIMATE CHANGE
the U.S. and other countries.
• Are electric cars the way forward?
• Clean and renewable energy (hydro,
solar and wind) – how will this impact
the energy market?

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THE BRANDS YOU
KNOW AND LOVE
It might seem too easy, but don’t dismiss it.

There’s a reason why the world’s biggest
brands are also some of the most profitable.
One of history’s best investors, Peter Lynch,
liked the doughnuts at Dunkin’ Donuts so
much that he invested in the company.
The great thing about investing in the brands
you know and love is that anyone can do
it. Your experience is as valid as an expert
investment analyst.
THREE WAYS YOU COULD USE THIS
EVERY DAY
1. What products or brands do you use
every day and can’t live without?
2. Have you found a great new service
or product that’s better than the
competition?
3. When you’re out shopping, which
shops look busy?

A great example has been the meteoric rise of

Your experience can show you exactly what’s
tonic drink producer, Fever-Tree. The company’s
happening right now. And you can use that to
only been around for 15 years. Before then, if you
see which shares could be worth a look,
wanted a G&T, you were pretty much restricted
or avoiding.
to Schweppes. Fast forward to today and it’s
become the world’s leading supplier of premium
carbonated mixers, with distribution to over 70
countries worldwide.

Every time you shop in a store,

eat a hamburger or buy new
sunglasses you’re getting
valuable input. By browsing
around you can see what’s
selling and what isn’t.
PETER LYNCH

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 RESEARCHING COMPANIES
How to get the information you need.
Buying shares shouldn’t be a spur-of-the-
moment decision. After all, you’re investing,
not speculating.
The more you know about the shares
you’re buying, the better your chances
of making money.
So before you buy, check to see if the
company you want to buy shares in will
make a good investment.
HOW HAS THE COMPANY BEEN DOING?
‘Past performance is not a guide to future
returns’. It’s a warning you’ll see a lot
when investing. And it’s true. There are no
guarantees that a share price will rise just
because it’s risen in the past. But to know
where a company’s going, you have to know
where it is today, and also where it’s been.
Have a look at a company’s latest share price
and charts showing their performance. A
quick glance can show a company in decline,
growing or meandering along. Charts can also
highlight sudden movements in the share
price, down or up. If this has happened, find
out why.
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WHAT HAVE THE COMPANY AND
OTHER PEOPLE BEEN SAYING?
Companies regularly provide updates on their
performance and future prospects. These
updates are an important tool that can help
you understand what’s been happening.
You can also read articles written in the
financial press or by experts, like at HL. We
provide research and views on many of the
UK’s largest and most popular shares.
HOW DOES IT COMPARE?
A great way to check your decision is to
compare the company you’re interested in
to a similar company. What do they do better
or worse?
You can use your personal experience of the
company, its products or service. But you
should also look at how their profits, sales and
dividends have changed over time. This will
give you a much better picture of a company
and its prospects. You never know, you might
decide their rival is a better option.
Know what you own,
and why you own it.
PETER LYNCH

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NINE PHRASES TO KNOW
BEFORE BUYING SHARES
Stock market jargon busted.
BID PRICE DIVIDEND YIELD
The price at which you can sell a share. This is the dividend paid by company as a
percentage. For example, if a company paid a
OFFER PRICE dividend per share of 5p and the share price
The price at which you can buy a share. was 100p, the dividend yield would be 5%.

BID/OFFER SPREAD It’s worth noting that dividends vary over time
The difference between the buying and and aren’t guaranteed. There’s no obligation
selling price. for a company to pay a dividend.

MARKET CAPITALISATION (MKT CAP) FTSE 100

A company’s value, based on its current The 100 largest companies by value listed on
share price. the London Stock Exchange.

DIVIDEND PRICE TO EARNINGS (PE) RATIO

Companies can pay out some of their profits This figure is used to value to a company
to shareholders as cash. This payment is the based on its current share price and
dividend. It’s often given as a yield or as a earnings (profits). It’s a useful way to
dividend payment per share owned. compare similar companies.

A lower PE ratio can imply a company that

is better value. But it can also highlight a
company with poor future prospects, so like
all ratios it shouldn’t be used in isolation.

STAMP DUTY
A UK government charge of 0.5% on share
purchases. Stamp Duty on Irish companies
is 1%.

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HOW TO BUY SHARES WITH HL
It’s easy to get started.

We’re Hargreaves Lansdown – a secure, FTSE

100 company helping UK savers and investors
for over 35 years. Our clients enjoy quick,
secure trading online and with the HL app.
It’s quick and easy to buy shares with us:

1.  LOG IN TO YOUR HL ACCOUNT, OR 2.  CHOOSE THE SHARES YOU’D

OPEN A NEW ACCOUNT IF YOU LIKE TO BUY
DON’T HAVE ONE YET Search for and select the shares you’d
like to buy. Or check out our expert
Choose the account that’s share research for ideas to consider.
right for you
Search for an investment
3.  RECEIVE A LIVE SHARE PRICE AND FIND OUT MORE
DEAL ONLINE IN SECONDS
You can buy and sell shares at any time
online or with the HL app. We charge a
maximum of £11.95 per deal to buy
and sell shares online.

More on our charges

 Hargreaves Lansdown 0117 900 9000
One College Square South info@hl.co.uk
Anchor Road Bristol BS1 5HL www.hl.co.uk

Issued by Hargreaves Lansdown Asset Management.

Authorised and regulated by the Financial Conduct Authority.
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