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 A great example of a defensive area of the
shrink. This cycle is natural and it has taken market is pharmaceuticals. Even when the
place throughout history. economy isn’t doing so well, people and
governments still need to spend money
When the economy is growing strongly, on medicines.
people are typically optimistic. They often
have more money and are happy to spend They’re called defensives because they can
it. But when times are tough, people tend to be a potential line of defence when stock
tighten their belts. They may forego luxury markets are falling. Of course, no company
treats, the family holiday or hold off buying can be completely recession-proof. And
a new car. defensive companies can still fall in value.

You can keep an eye on this cycle, and use For example supermarkets are seen as
its ups and downs to pick which shares you defensive - people need to eat, even during
buy at which time. a recession. But you could also switch to a
cheaper supermarket or different brands
DEFENSIVE SHARES of food and drink.
You can think of defensive shares as
‘steady-eddies’. They may not grow as Tip: Think about the products and
fast during the boom times, but they also services you’d buy even in tougher
haven’t struggled to the same extent in times – the companies selling them
tougher times. That’s because companies are probably ‘defensives’.
with defensive shares sell things or provide
services that people need and use, no
matter what the economy’s doing.

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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, 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 • How will our need for
peoples’ wealth increases, they usually cybersecurity drive innovation?
spend more too. And the companies that • Is wearable technology a
benefit most are usually those selling luxury growing market?
goods, technology, cars, wines and other
similar items. RISING HEALTHCARE SPENDING
• People living longer in developed
Of course, there’s an element of guesswork countries – how will this affect
with predictions like these. If you get it their needs and which companies
right, you could benefit for decades. But will meet those needs?
buying into a big theme is no guarantee of • Growing middle-class consumers
success. Some companies will thrive, while in emerging markets – who needs
others won’t. Remember, for every Netflix what level of care, and who
there’s a Blockbuster, and for every iPhone®* provides it?
there’s a Blackberry.
CLIMATE CHANGE
* iPhone is a trademark of Apple Inc., • Are electric cars the way forward?
registered in the U.S. and other countries. • 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 THREE WAYS YOU COULD USE THIS
brands are also some of the most profitable. EVERY DAY
One of history’s best investors, Peter Lynch,
1. What products or brands do you use
liked the doughnuts at Dunkin’ Donuts so
every day and can’t live without?
much that he invested in the company.
2. Have you found a great new service
The great thing about investing in the or product that’s better than the
brands you know and love is that anyone competition?
can do it. Your experience is as valid as an
3. When you’re out shopping, which
expert investment analyst.
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- WHAT HAVE THE COMPANY AND

moment decision. After all, you’re investing, OTHER PEOPLE BEEN SAYING?
not speculating. Companies regularly provide updates on their
performance and future prospects. These
The more you know about the shares updates are an important tool that can help
you’re buying, the better your chances you understand what’s been happening.
of making money.
You can also read articles written in the
So before you buy, check to see if the financial press or by experts, like at HL. We
company you want to buy shares in will provide research and views on many of the
make a good investment. UK’s largest and most popular shares.

HOW HAS THE COMPANY BEEN DOING? HOW DOES IT COMPARE?

‘Past performance is not a guide to future A great way to check your decision is to
returns’. It’s a warning you’ll see a lot compare the company you’re interested in
when investing. And it’s true. There are no to a similar company. What do they do
guarantees that a share price will rise just better or worse?
because it’s risen in the past. But to know
where a company’s going, you have to You can use your personal experience of
know where it is today, and also where the company, its products or service. But
it’s been. you should also look at how their profits,
sales and dividends have changed over
Have a look at a company’s latest time. This will give you a much better
share price and charts showing their picture of a company and its prospects.
performance. A quick glance can show a You never know, you might decide their
company in decline, growing or meandering rival is a better option.
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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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
OFFER PRICE a dividend per share of 5p and the share
The price at which you can buy a share. price was 100p, the dividend yield would
be 5%.
BID/OFFER SPREAD
The difference between the buying and It’s worth noting that dividends vary over
selling price. time and aren’t guaranteed. There’s no
obligation for a company to pay a dividend.
MARKET CAPITALISATION (MKT CAP)
A company’s value, based on its current FTSE 100
share price. The 100 largest companies by value listed
on the London Stock Exchange.
DIVIDEND
Companies can pay out some of their PRICE TO EARNINGS (PE) RATIO
profits to shareholders as cash. This This figure is used to value a company
payment is the dividend. It’s often given based on its current share price and
as a yield or as a dividend payment per earnings (profits). It’s a useful way to
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-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 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 [email protected]
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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