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. Investing in individual companies isn’t right for everyone. Shares are for
people who understand the increased risk of investing in individual shares. If the
company fails you risk losing your whole investment.

You should make sure you understand the companies you’re invested in, their specific
risks and make sure any shares you own are held as part of a diversified portfolio.

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 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 22 February 2022.

THREE WAYS TO PICK SHARES
Easy methods to consider when buying shares.

Investing in shares may seem daunting, but

while it’s not for everyone, you don’t have to
be rich, famous or have a PhD.

In this guide we look at three easy methods

people use to help decide which shares
to buy.

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
with good returns.
company can anticipate or react quickly
2. T
 he goods or services the company to them.
sells are always in demand, preferably
3. In the good times, the company doesn’t
across a number of different countries.
over-expand.
3. The company pays a healthy dividend
to shareholders – paying out profits as a MAJOR CYCLICAL AND
dividend shows the people who run the DEFENSIVE SECTORS
company are confident the company
will continue to make profits in future.
Cyclical sectors Defensive sectors

CYCLICAL SHARES Aerospace Food

Cyclical shares typically mirror the health
of the economy. Profits and dividends Automotive Beverages
rise during the good times, but suffer
during slumps. Banks Healthcare

Construction Household goods

It’s difficult to judge when the market has
hit the bottom. But if you buy at the start Engineering and Industrials Life insurance
of an 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 Property Water
then feel the knock-on effect as the shops
reduce their orders. However, makers Retailing
of components and producers of raw
Travel & Leisure
materials come into the 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,
it’s possible to make good profits. But of
course there are no guarantees. Shares
will rise and fall in value.
An example of a big theme is the growing
middle-class in countries like India. As
peoples’ wealth increases, they usually
spend more too. And the companies that
benefit most are usually those selling luxury
goods, technology, cars, wines and other
similar items.
Of course, there’s an element of guesswork
with predictions like these. If you get it
right, you could benefit for decades. But
buying into a big theme is no guarantee of
success. Some companies will thrive, while
others won’t. Remember, for every Netflix
there’s a Blockbuster, and for every iPhone®*
there’s a Blackberry.
* iPhone is a trademark of Apple Inc.,
registered in the U.S. and other countries.
HERE ARE THREE BIG THEMES TO
GET YOU STARTED:
TECHNOLOGY
• Will there be a continued shift to
online services and products?
• How will our need for
cybersecurity drive innovation?
• Is wearable technology a
growing market?
RISING HEALTHCARE SPENDING
• People living longer in developed
countries – how will this affect
their needs and which companies
will meet those needs?
• Growing middle-class consumers
in emerging markets – who needs
what level of care, and who
provides it?
CLIMATE CHANGE
• 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

Your experience can show you exactly
of tonic drink producer, Fever-Tree. The
what’s happening right now. And you can
company’s only been around for 15 years.
use that to see which shares could be
Before then, if you wanted a G&T, you were
worth a look, or avoiding.
pretty much restricted 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
The price at which you can sell a share.
OFFER PRICE
The price at which you can buy a share.
BID/OFFER SPREAD
The difference between the buying and
selling price.
MARKET CAPITALISATION (MKT CAP)
A company’s value, based on its current
share price.
DIVIDEND
Companies can pay out some of their
profits to shareholders as cash. This
payment is the dividend. It’s often given
as a yield or as a dividend payment per
share owned.
DIVIDEND YIELD
This is the dividend paid by company as a
percentage. For example, if a company paid
a dividend per share of 5p and the share
price was 100p, the dividend yield would
be 5%.
It’s worth noting that dividends vary over
time and aren’t guaranteed. There’s no
obligation for a company to pay a dividend.
FTSE 100
The 100 largest companies by value listed
on the London Stock Exchange.
PRICE TO EARNINGS (PE) RATIO
This figure is used to value a company
based on its current share price and
earnings (profits). It’s a useful way to
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-listed company helping UK savers
and investors since 1981. 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
OPEN A NEW ACCOUNT IF YOU
DON’T HAVE ONE YET
Choose the account that’s
right for you
2.  CHOOSE THE SHARES YOU’D
LIKE TO BUY
Search for and select the shares you’d
like to buy. Or check out our expert
share research for ideas to consider.
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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