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What you need to know before choosing shares

It goes without saying that choosing the right shares is crucial if you’re going to be a successful investor. But just how do you choose the best shares for you from the thousands of company shares that are out there? Fidelity’s Emma-Lou Montgomery shows you how.

Here’s how to kick-start your share portfolio in three simple steps.

1. Invest in what you know

Legendary investors Warren Buffett and Peter Lynch have both made their names – and their fortunes – by sticking to this one important rule.

Investing folklore has it that Lynch, a former fund manager once invested very successfully indeed in undergarment manufacturer Hanes, after his wife commented on the quality of their tights and stockings.

2. Do your research

Never invest without doing your research. Look at the company’s share price and get to grips with the company and the sector it’s in. Taking a look at the company’s latest set of results or a recent trading update will let you know how business is going and what the prospects are going forwards.

When you invest in a company, you’re actually buying a small stake in that business. So ‘Google’ the company’s name and read-up on it. There’s a world of information out there, that’s easy and free to access. As famed investor Peter Lynch once said: “Never invest in any company before you’ve done the homework on the company’s earnings prospects, financial condition, competitive position, plans for expansion, and so forth.”

3. Learn the lingo

Once you start delving deeper you’ll see some phrases cropping up again and again. Two essentials are PE ratio and dividend yield.

Quite simply, the price-to-earnings or PE ratio is the best indicator of how expensive a share is. To calculate the PE you take the current price per share and divide it by the company’s earnings per share. It gives you a better sense of the value of the company’s shares.

The dividend yield is a good way to compare companies and will be of interest if you want an income from the shares you invest in. The dividend yield, which is calculated by dividing the annual dividend pay-out per share by the share price, will tell you what sort of percentage rate of return you can expect.

To find out more and to research the companies you want to invest in, go to fidelity.co.uk/shares or call 0800 358 7716.

Important information 

The value of investments and the income from them can go down as well as up so you may get back less than you invest. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for illustration purposes only.

This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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