A Guide To Selecting Shares (EGuide)

TD Direct Investing
A Guide
to Selecting
Shares
Selecting Shares eGuide
Introduction
The TD Direct Investing eGuide, Understanding the Stock Market
and Shares explained that assessing the merits of your potential
investments is an essential part in deciding which shares to buy.
Using a non-advised brokerage means you will be using your own
judgment and skill rather than taking professional advice. It is
assumed that during your process of selecting your shares you will
consider your investment goals, time horizon and whether you are
looking for income (by way of dividends), or growth (by an increase
in value). This eGuide focuses on the selection of individual shares.
If, having read this eGuide you prefer the choice of company shares
to be made for you by professionals then you may prefer to select
Funds on a non-advised basis instead and you can read about these
collective investments in the Funds eGuide.
READ MORE>>
This eGuide is intended for educational purposes only and as such

should not be treated as investment advice or a solicitation to make
an investment decision based on the content of this eGuide.
Investors should be aware that the value of an investment can
go down as well as up. You may not get back all the money that
you invest.
Investing in individual companies is likely to involve taking greater
risks than investing in professionally managed funds because
portfolio diversification is likely to be more difficult to achieve.
Active share selection is therefore unlikely to be suitable for clients
without significant investment knowledge and experience.
If you have any doubt over the suitability of a particular investment
for you then you should seek independent financial advice.
The tax treatment of shares depends on the individual
circumstances of each client and prevailing UK Taxation Law
and may be subject to change in the future.
The information contained in this eGuide was correct at the time
of publication.
Version 0.1 February 2014
Investment behaviour | Getting started: idea generation | Analysis: using company fundamentals
Ten key financial indicators | Investment styles | Analysis: charts and technical analysis
Stock selector tools | Idea testing and a balanced portfolio | In summary | Legal Disclosure
Introduction
It is always wise to do your own research before making your
own investment decisions. That is what the professionals do.
While that in itself is still no guarantee of success, knowledge
and understanding will help you become a more confident
investor. Following a hunch is no substitute for analysis and
reasoning and also being aware of investor behaviour and your
own preferences. Fortunately, there is a wealth of information
available that is now a mini-industry in itself; videos, books
and magazines, information websites, self-selection tools
and market data provided by broker platforms are all easily
accessible. These also usually provide up to date price, company
and fund information, news, company selection and charting
packages, plus independent analyst articles. All of these can
help you form your own opinions.
There are many strategies used to decide which shares to buy.

None are infallible, but they are techniques based on using
factual evidence, analysis and reasoning. Some of these are
highlighted in this eGuide, so whether you have a short or
long term investment goal you can then use them as the
starting point for your investigations before putting some of
them into practice.
The eGuide is divided into three main sections about the process
of selecting shares; idea generation; Fundamental and Technical
Analysis; and then testing your ideas out. Remember that past
performance is not a guarantee of future performance and the
success of your selection will depend on your skill and judgment
as well as the time you are willing to devote. Before this it is
worth reflecting briefly on the impact of human behaviour on
markets and investing and how this can affect you.
Investment behaviour
It is sometimes assumed by investors that stock markets
always act in predictable and rational ways. This is the basis
of traditional economic theory and has become known as
the Efficient Market Hypothesis. After all, there is supply and
demand, many market participants, they are highly regulated
and there is plenty of information on which to base rational
decisions. All these undoubtedly help make stock markets
highly competitive and efficient. There is usually a trade-off in
that the more investment risk you are willing to take the larger
the rewards or losses could be.
However, the financial crisis in 2007 was not predictable and
there were many unintended and complex consequences that
are still affecting nations, companies and individuals. While it is
sometimes easy to be wise after the event, predicting financial
outcomes beforehand cannot be done with certainty. Even stock
markets can be interpreted as irrational or overreact to events
at times and while this is partly because they are increasingly
hi-tech and complex it is also because of our human nature
we all have psychological biases and emotions ingrained in our
decision making, both as individuals and in groups.
The human influence has been studied and become known

as behavioural finance, which seeks to understand how the
human mind influences investment success. There are far more
subtle influences at work than simply greed or fear and this
eGuide cannot describe them in great detail. Nevertheless,
when investing it is useful to consider such factors as being
overconfident in success or being oversensitive to losses.
There is also inertia, where putting off financial decisions is
a human trait - this is one of the reasons behind the recent
auto-enrolment into pension plans in the UK. Even the way
we use information can also be biased, it is easy to partially
filter information to support a decision or to assume that past
performance is an indication of future performance.
As we will see, one of the potential ways to reduce these
natural biases is to adopt a methodical and more rational
approach to investing, through generating ideas, then
researching them and then trying them out. Some of the more
popular techniques make up the remainder of this eGuide.
They cannot guarantee success but they will help you become a
more confident investor.
Getting started: idea generation

Getting started on the search for shares that match your
investment goals and tolerance for risk is often the hardest part.
How should I start? and what should I look for? are two
questions that may be on your mind.
There are many thousands of company shares to buy on both
UK and International Markets. Thankfully there are a number of
methods that you can use to draw up your potential investment

shortlist. The initial ideas you have may of course be subjective
as they will be based in some part on your own interests,
character and motivation. Interesting investment ideas can come
from all manner of sources, as we will see below.
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1. Economic and political influences
The bigger economic and political picture is a powerful
shaper of company performance. Every countrys economy
goes through periods of growth and recession, known as the
economic cycle. The outlook for the cycle will usually affect
company performance to some degree but some shares are
more influenced by domestic and international events than
others. Factors such as a change in Government, Taxation or
even extreme weather can leave their mark. Some industry
sectors therefore perform better than others at different times.
Some shares are cyclical, moving with economic news and
events - these typically react to downturns by reducing costs,
products or markets. Conversely, they may grow quickly in
better times by entering new markets or developing new
products. Construction, technology, retailing and leisure shares
are often cited as sectors where this behavior is seen. Other
companies may not be as nimble yet rely less on the state of
the economy - they are sometimes referred to as defensive
stocks and can be particularly attractive at a time of falling
markets or recession, where continuing customer demand
or a wide geographical market spread provides them with
some insulation against economic adversity. Pharmaceuticals,

tobacco and utilities may often still perform relatively well in
such circumstances. It is therefore worth remembering how the
future economic cycle and political events might affect individual
company performance and look for those factors that could
have greatest influence when considering specific company
shares.
2. News and events
Perhaps the simplest method is to be aware of news and current
events. This might be general company news or events such
as a forthcoming company IPO or a buoyant industry sector.
The financial media are full of share tips and opinions, in
newspapers, magazines or online. Some of these may attract
you or you may discover a particular interest in an industry
sector, such as technology, retailing, manufacturing, finance or
commodities.
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3. Major themes and trends
Major themes and trends also emerge over the longer term.
This might be developing economies, such as China, which can
present opportunities or pose threats depending on the type
of business a company is in. For example, China has boosted
those companies involved in exporting resources for their
manufacturing growth and an expanding wealthy middle class
has driven consumption of luxury items. Conversely, Chinese
manufacturing strengths might threaten UK based production.
Other major themes such as an aging population and longevity
will drive demand for healthcare and pharmaceuticals, while a
baby boom might present future opportunities for education.
The development of technology has led to radical changes in
communications, retailing and manufacturing while growing
environmental concerns has contributed to the search for
alternative energy sources and ethical investing.
4. Company announcements and results
Individual company performance is of course a major source
of ideas. While specific financial performance will be discussed
below under company fundamentals, there is also a wider
dimension that market sentiment and Institutional and Analyst
expectations can have a major bearing on the direction of share

prices. Profit warnings may adversely affect a share price. There
again, a company may announce good results but its share price
falls, which on the surface appears contradictory. This could
be because many investors decide to sell and take profits or
because the results were still at a lower level than the Analysts
expectations. However, for a company or industry sector in
recovery, growth may be seen as an indicator of green shoots
that will lead to further growth prospects and a rising share
price as the demand for shares increases.
5. Share Tips
Share Tips are widely published. They can be a starting point
to find ideas but you may or may not agree with the reasons
being given for the prediction. It is never wise to follow these
without doing your own research; you may find some analysts
are tipping a particular company to buy while others are
recommending a sell! Be aware too that a share could be tipped
so heavily that its price moves under trading pressure and by the
time you are ready to invest the opportunity has passed.
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6. Directors dealings
7. Top buys and sells
No-one should know a company better than its Directors as

they have access to privileged information and are tasked with
running the company. At certain times of the year the Directors
will not be able to buy or sell shares in their own company,
usually before their results are announced. However, at all
other times they can trade just like any other investor as long
as they inform the Stock Exchange and the information is then
published. Many investors follow large dealings closely, as a
Director that is buying may be signaling their confidence in the
future or anticipating market events, and vice-versa. Of course,
with Director sales this may just be a case of changing personal
circumstances rather than indicating company performance,
so it is sometimes seen as being a stronger measure when a
number of Directors are buying or selling at the same time.
Just as review sites collect personal opinion; published facts

about the most popularly traded shares indicate market
sentiment and are a snapshot of the current marketplace. This
has become popularly known as the wisdom of crowds, as it is
sometimes argued that a consensus of many similar decisions
have a higher predictive value than one person acting alone.
This has been the subject of a great deal of study, however, the
criticism of this approach made by Contrarians is that following
the behaviour of others will not necessarily produce a better
outcome because you may be acting too late on a market
advantage that has already passed. There is also an assumption
that everyone is expert and acting rationally and as we have
seen this is not always the case! Contrarian investing has
developed as an alternative system based on identifying, and
then deliberately speculating against movements in stock prices
that reflect the sentiments of the majority of investors. This
technique is often employed by Hedge Fund Managers but it is
a high risk strategy as success relies on predicting exactly when
the stock price movement will change.
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8. Your personal experiences
Your own customer interactions can be a good source of
information and ideas and should not be ignored. A positive
customer experience can have a major influence on your
own preferences. Perhaps the most straightforward examples
are found in the travel, hospitality and retail sectors. Who is
busy and why? Is it because of customer service, quality staff,
branding or superior products that drive success? Your own
experiences are a valuable source of ideas. This has now been
taken a step further online, with review sites and social media all
inviting opinion and providing a snapshot of which businesses
are thriving and which are just surviving, based on aggregated
customer opinions.
Some investors also prefer to invest on ethical principles. This

is not just whether a company is seeking to be environmentally
friendly, sometimes referred to as light green. This might
extend further into dark green issues such as how the
company treats its workforce, pays its tax liabilities or avoids
making or distributing products that are potentially toxic.
Protecting reputations and customer trust is particularly
apparent amongst large multinational companies or well-known
brands. A statement of company operating principles is often
publicly made by such firms so that customers and potential
investors can make informed choices.
A positive customer experience

can have a major influence on
your own preferences.
Analysis: using company fundamentals

Having used idea generation to find some potential shares to
invest in now is the time to take a closer look at the potential of
your shortlist. It was once said by investment guru Warren Buffet
that, I try to buy stock in businesses that are so wonderful
that an idiot can run them, because sooner or later, one will.
One popular way of assessing a company more thoroughly is
to use its fundamentals. In essence that is a portrait of the
companys financial health and performance shown by the
financial indicators found in the published company report
and accounts. The strength of a company balance sheet, its
profitability, borrowing and cash flow are important clues
to how a company is performing in its market and indicates
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the quality and strength of its management and staff. Similar

companies and industry sectors can also be compared. You
do not need to be a qualified accountant to grasp some key
published ratios which are clues to performance.
Do remember also that when looking at company report and
accounts, there are also many non-financial clues included about
management capability, products, competitive advantages and
future prospects that will help you build a picture of whether the
company in question is attractive to you. Lets look at how some
of these and how financial ratios can bring out further insights.
Ten key financial indicators

1. Profit margin
2. Acid Test
First, take a look at the profit margin. This can be expressed

as gross, net or operating profit. Operating profit (EBIT, or
earnings before interest and tax) is often the best measure
as it removes any adjustments for taxation. This is simply the
profit divided by the sales revenue and shown as a percentage.
Margins will differ between sectors, for example food retailing is
relatively low margin and relies on high turnover, while margins
on luxury goods are frequently far higher but are aimed at a
smaller market. Margins are a good benchmark to compare
similar companies and will also show how the company is
controlling its costs. Usually, the higher the profit margin
achieved the better, particularly if this is sustained over the
longer term.
The figurative description of this ratio derives from the days

when gold prospectors would use acid to prove that their
nuggets were real gold. Also known as the Quick ratio, this looks
at whether a company has sufficient liquid assets to immediately
pay off any liabilities should it need to. Usually expressed as
current assets less stock and prepayments divided by current
liabilities, the ratio should be 1:1 or higher because this means
that the company is liquid in that it can meet its short term
financial obligations without looking for more forms of finance.
Margins are a good benchmark to

compare similar companies and
will also show how the company is
controlling its costs.
3. Return on Equity
This ratio takes the net profit (earnings after tax and interest)
of the company and divides it by shareholder equity. The
resultant percentage shows how well it is using shareholders
capital to generate returns, in other words, the percentage
profit a company generates with the money shareholders have
invested in it. That return is a useful comparison measure across
companies in the same industry or a comparison to how much
you would have earned on your investment had you invested in
a low risk asset like cash. The larger the number the more return
you have earned.
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4. Debt and gearing
5. Earnings per share (EPS)
The level of company debt is also a key performance indicator.

This is often referred to as gearing, or leverage. Most
companies need to borrow money to fund their business.
Gearing is a percentage expressed as the total amount
borrowed (less any cash held) divided by shareholder equity.
Some businesses are more naturally highly geared, usually if
they need to invest in or renew expensive plant and equipment.
Others may take advantage of low interest rates or a positive
economy to use borrowing for expansion or to buy other
companies. The key though is an assessment of interest cover,
i.e. whether the company can service its debt meaning can
the loan interest payments be met and can the loan be repaid
if necessary. This is calculated as EBIT divided by the annual
interest paid. Running a company on high borrowing can be
risky, particularly in times of sharp recession if the lender recalls
the loan or precludes further lending. That can be a brake on
business and even lead to business failure. Again, comparing
this ratio to the industry sector can help show whether the level
of debt is prudent and well managed and provide clues as to
the investment needs of the business.
Earnings per Share, (EPS), is an important driver of share prices

because it shows shareholders what the return on their share
investment is worth. In addition investors can easily make
comparisons - yearly and between companies. It is therefore
one of the most important measures of profitability. In other
words, this tells you how much money the company is making
for its shareholders, so it is a measure of earning power. This
can be down to changes in profit but also shows the effects of
any further issuance of new shares, as might happen with an
acquisition. EPS is expressed as an amount per share, being the
proportion of a companys net profit divided by the number of
shares in issue.
READ MORE>>
The level of company debt is also a key

performance indicator. This is often
referred to as gearing, or leverage.

6. Price to earnings ratio (P/E)
7. Dividend yield
The share price itself is a key indicator because this shows how
much the company is valued at. However, its market price alone
does not indicate whether these shares are relatively cheap or
expensive. Instead, the price to earnings or PE ratio is used to
measure this. This percentage is simply the share price divided
by the EPS. It can be applied both historically and to future
forecasts. Slow growing or mature companies will generally
have lower and more stable PE ratios than high growth or young
companies but again this ratio should not be used in isolation,
rather as a comparison against similar companies in the industry
sector. For example, if the average P/E for the industry is 8; a
company figure of 12 would indicate strong investor demand
and expected growth. Conversely a figure of 4 would show
that the shares are not widely favoured and have low growth
expectations.
This is calculated as the dividend paid to investors divided by the

share price and represents the income an investor is obtaining
on their investment. This is of course an important measure if
you are looking for income consistency rather than growth.
Clearly, it cannot be used where a company does not pay
dividends, but it can be helpful to compare with the return on
investment from other investment asset classes, such as cash
and bonds.
8. Dividend cover
This measures the ability of a company to pay a dividend to
shareholders out of its profits and the risk associated with this
being able to continue in the future, both of which factors
could influence the share price. It is calculated as the Dividend
paid divided by the Earnings per Share (EPS). A low figure may
indicate that a company may not be able to sustain the level
of dividends paid in the future if profits fall, while a high figure
may suggest the company is retaining more profit, perhaps to
reinvest in future growth or to service outstanding loans.
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Do remember that an important technique underlying using
these fundamentals is, in other words comparing the company
performance with its peers in the industry to create context
about its market performance.
9. Dividend Discount Model (DDM)
The Dividend Discount Model (DDM) is the basis for many
fundamental calculations relating to the market value of an
investment. The value is determined by looking at the returns
expected on the investment (dividends and capital growth)
against the rate of return required by investors. The future
returns are discounted to the value they would represent
today, called net present value. The formula is relatively
complex but the result is simple to understand: if the value
obtained from the DDM is higher than the price the shares are
currently trading at in the market then the stock is theoretically
undervalued, and vice-versa.
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10. Financial Forecasts

Important clues can be gained from the Companies stated
future outlook. Companies will use historical accounting data
and assess external market factors to produce their forecast of
what they expect to happen over the next year, for example
to revenues and profits. Frequently, market analysts will assess
this outlook against their own predictions. The forecast can
therefore be an important benchmark of success and have a
direct bearing on the companies share price if the subsequent
performance does not match these expectations.
The Dividend Discount Model (DDM)

is the basis for many fundamental
calculations relating to the market
value of an investment.
Investment styles
There are of course other financial ratios that can be examined
but those listed above have the advantage of being relatively
simple and published so you usually do not need to work them
out for yourself. There are even online tools available to help
with analysis - look for the Companies and Market Information
online section at your brokerage, which usually is made
available to you once you have an account. Beware though
of using any one measure in isolation. Instead, they are best
used together to paint a broader picture of what the company
is doing and suggest how it might perform in the future, the
direction of its share price and what business risks it is facing.
Nevertheless, these ratios do lead some investors toward
their preferred style of investing and you will come across the
following terms in wide use:
Value investing is a strategy that looks for shares that are
currently underpriced by the market in the expectation that their
price will eventually rise. Low P/E ratios or high dividend yields are
frequently used to try to identify these undervalued shares. This
is because of the belief that because these companies currently
appear relatively cheap when compared to their earnings they
may be a good investment in the longer term as their price rises.
Growth investing seeks fast growing and innovative
companies to maximise the value of your investment through
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rising share prices. This time a higher P/E ratio is a key indicator,
particularly if accompanied by strong sales, earnings growth and
margins. Smaller companies are often examined for opportunity
in this way. Do beware of the possibility of speculative bubbles
created by market demand that can reverse quickly if the
expected performance is not delivered.
Income investing looks for medium to long term sustainable
returns from solid companies that historically pay good
dividends to their investors as a way of providing shareholder
value. Examining Dividend yield and Dividend cover are
particularly useful here. This is usually associated with large and
stable blue-chip companies.
Using these fundamentals can provide powerful analysis and
it is possible to use the different styles to create a diversified
share portfolio to mitigate some of the risks involved. These
techniques can be daunting at first and it is worth having a
financial glossary to hand - many brokers will provide this. There
is of course an entire industry devoted to the subject, with many
books, videos, webinars, seminars and tutorials to help you
deepen your understanding. Many broker platforms also offer
sophisticated Stock selector tools. We will look at those tools
after looking at Charting and Technical analysis.
Analysis: charts and technical analysis

Some investors prefer to base their stock selection strategy
based on Technical Analysis. They are less interested in company
fundamentals. Instead they look to examine historical market
data and trends with a range of sophisticated mathematical
models and visual charting tools. A fundamental assumption is
that a market price accurately reflects all the information that is
known about a company and that prices also trend directionally.
Moreover, chartists assert that history has a habit of repeating
itself and so use past prices as a predictor of future prices.
Using charts to do this is now the most popular form of
Technical Analysis because of the rise of electronic trading,
instant market data and internet-based tools alongside the
many types of chart available. These charts are used to seek
indicators, patterns and trends in historic price data that
advocates use to predict the future price movements in shares.
The basic concepts are identifying trends and discovering what
is known as support and resistance, plus making calculations
based on share price.
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In the charts above, it is easy to see that share prices rarely move
in straight lines but despite this patterns and directions can
often be seen over time, known as trend lines. These trends may
extend over months and years, or, in the case of fast-moving
markets, intraday, in only minutes and hours. Chart users
therefore extend these trends into the future as a predication.
The issue comes as you do not know when the trend will end,
which is when a share price breaks out of the trend, either
upwards or downwards. This breakout can show a decisive price
move and potentially be the start of a new trend.
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May

As the share price moves up, some investors will be tempted to
sell to make a profit and according to supply and demand this
will then tend to reduce the price, and vice-versa.
Frequently though, the share price will remain inside these
upper and lower trend lines. The upper price level is known as
the resistance level, while the lower price level is the support
level. Conversely, momentum investing looks for those shares
that seem to exhibit behaviour that traditional economic theory
finds hard to explain; this is that sometimes a share will show a
short term tendency for its price to go on rising or falling.
There are many different ways of graphically displaying price
data over different time periods. This can be straightforward,
as line graphs and bars over different time periods. You can
also gain insights by overlaying the sector, peer companies or
the market index. Trend lines can be drawn and support and
resistance levels determined.
If you recognise an upward trend, this may influence your

decision to buy a share in the hope that this continues, a
downward trend may suggest a wait and see approach. If a
price has not moved above its resistance level you may decide
to wait until it does before buying. Conversely if the share is
trading near its support level you may decide to buy based on
an interpretation that the price will not fall further.
It is worth becoming familiar with the basic charting packages
made available for free as a key to success in selecting shares
is timing. You may have identified shares that are attractive to
you because of fundamentals or other selection techniques.
Overlaying some charts based on market data may help
validate or influence your thinking on whether you should buy,
sell or hold.
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Overlaying some charts based on market data may help validate

or influence your thinking on whether you should buy, sell or hold.
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There are many more advanced Charting techniques based on

extensive mathematical research. This eGuide cannot provide
detailed explanations these but again there is a wealth of
educational material widely available that can guide a deeper
exploration for those inclined.
Top down considers the big picture first by assessing the

prospects for the main asset classes in each of the worlds major
investment regions against the backdrop of the world economic,
political and social environment. This output then drives the final
share selection.
When selecting shares there are a whole range of different

techniques available to you to generate initial ideas and then
analyse them to generate a shortlist. Some are relatively simple;
others more complicated. This eGuide suggests that you explore
some of these ideas and choose those that you are most
comfortable with and have time for. It is recommended that you
use more than one technique as they are not mutually exclusive
and can help validate your research from different perspectives.
You may also choose to apply your fundamental and/or
technical research in two ways, popularly known in investment
management as Top down and Bottom up investment
management.
Investors applying Bottom up pay little attention to comparison

benchmarks or a wider context and instead focus solely on the
unique attractions of an individual company share.
This eGuide suggests that you

explore some of these ideas
and choose those that you are
most comfortable with and
have time for.
Stock selector tools

Many brokerages now offer a range of sophisticated stock
selector tools that are integrated into their websites. These are
frequently sourced from third party analysts and they show upto-date company and market data. They are normally free but
because they are expensive to provide and maintain these are
usually made available for your use once you have opened an
account. Often they are grouped together under the heading
of Markets and Research. Many of these valuable tools even
allow you to trade directly without having to use a separate
trading screen and are even made available on Mobile Apps.
Alternatively, you may decide to subscribe to these services
directly for a fee or test them out with a time limited trial as
naturally they will take a little time to get familiar with.
Stock quickrank is a ranking tool that is frequently the
gateway to the other tools, enabling you to sort and filter
company data easily. It normally combines key pieces of
company information with short and long term returns,
valuations and the key financial ratios. For example, you can
choose shares based on the selection styles of income, growth,
value and momentum as explained earlier in this eGuide, using
fundamental analysis.
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Once this tool produces a set of search results you can then
examine each one in more detail by accessing stock reports
that contain detailed information and charting. Alternatively,
you can go straight to a wealth of information, including
sections on Directors dealings and analyst sentiment. All this
information can be saved and printed for future use, and some
providers even allow data export into your own spreadsheet
package. News charts show how company news and activities
have affected its share price over various time periods, while
there are suites of customisable technical charts at various levels
of sophistication.
Index views allow users to review the market on an intraday
basis showing, for example, the top gainers and fallers, the most
actively traded shares; high and low prices for a share, liquidity
and how the share bid/offer spreads have varied. Heat maps
allow users to make visual comparisons on the movement of
rising and falling company share prices where colours are used
to represent the size of share price movements on a grid.
Level 2
Most free market data feeds are delayed by 15 minutes.
However, Level 2 tools may be made available, offering more
comprehensive real-time streaming market data. This replicates
the software that professional traders use and access usually
requires an additional subscription fee and will be of interest to
more sophisticated or regular investors. One of the advantages
of using Level 2 is that you can access the order book of
the stock exchange and can see buy and sell orders that are
awaiting execution in the market, known as market depth. This
shows the demand for the shares and the direction of price
movements and bid/offer spreads. The package will usually
include advanced charting and technical analysis tools, so
facilitating many of the techniques described above.
However you approach selection, take your time and do your
research. No technique or tool is infallible but using these ideas
and the associated software is designed to help you become a
more knowledgeable and confident investor.
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Idea Testing and a Balanced Portfolio

Having created a shortlist from idea generation and analysed
those shares of interest you may now want to make your
investment decision, whether that is to buy, sell or hold the
shares you have identified. Before finally committing your
capital you might instead decide to test out your ideas first to
see if they would have worked in the way you anticipated and
why that was the case. Again, there are online tools to help you
with this simulation.
Many online platforms provide stock watch facilities that
keep and track individual share performance. You can use this
to set up a fantasy portfolio of selected shares. Joining an
online trading game is another technique that can be used to
test ideas and see if your predictions turned out in the way
you expected. You can also monitor the performance of your
chosen shares using the charting tools mentioned above.
This way, regardless of whether your investment ideas were
successful or not you will develop a deeper understanding and
further develop your share selection abilities. This is a way of
using the benefit of hindsight without risking your capital.
21
When the time comes to make your investment you should

still have your investment goals and your tolerance for the risks
involved in mind, ensuring that your final share selection still
meets those original criteria. In addition, it is wise to spread
your investment risk by diversification and not invest all of
your capital into one company. By spreading your investments
across a range of different shares, perhaps in different sectors
and geographies you will reduce your exposure to risk of
loss from a single company. We have seen that different
companies may be in different stages of the economic cycle,
exposed to different risks or be at different stages of their own
development. Following the same reasoning you can extend
this idea by considering making investments in alternative asset
classes as well as shares that have different characteristics. For
example, you might create a combination of shares, bonds,
cash and different types of Funds in your portfolio over time
as the relative performances of different assets may be only
weakly correlated.
In summary
Whichever selection methods you choose, never forget the
bigger picture. Keep up with the news, as global as well as local
political and economic events can have a big influence on the
value of your investments. It is also important to consider your
emotional involvement and personal biases, and how these
can influence or impair your judgment. Understanding your
investment goals, time horizon and attitude to risk at the outset
can also help in this respect.
If, after reading what is involved in company share selection

you prefer the choice of company shares to be made for you
by professionals that employ these kind of techniques then
you may prefer to select collective managed investments such
as Funds on a non-advised basis instead. This can be actively
managed funds that attempt to outperform the market or
passive investments that seek to replicate market returns.
More information in Funds eGuide
There is always market opportunity so there is no rush. Consider

using platform or broker facilities to test out your trading ideas
before making a commitment. Whether you are experienced or
a novice, the motto is, do your homework first.
This eGuide has outlined some of the techniques that can

be used to select shares and monitor their performance at
an introductory level. It has described how you, the trader
or investor, can decide which shares should be part of your
personal investment portfolio. Online investing means that there
is no shortage of information and tools available to you to use.
Using and developing the techniques you are most comfortable
with will help you to plan your financial future in a rational way
and help you become a more confident investor.
These techniques can be used throughout the lifetime of your

investments. Once you have invested it is wise to track the
performance of your investments and spot new opportunities
or risks using the same tools and techniques to consider
whether you should buy, sell or hold on for longer. Equally,
your investment goals may change over time according to
new life events and personal circumstances and you may need
to review these and then take action. This could be taking
profits, crystalising your losses or changing the mix in your
investment portfolio.
22
If you would like to continue your shares and funds factfinding journey, please visit www.tddirectinvesting.co.uk
for more information.
Legal Disclosure
Brokerage Services provided by TD Direct Investing (Europe) Limited (a subsidiary of The Toronto-Dominion Bank). Incorporated in
England and Wales under registration number 2101863. Registered office: Exchange Court, Duncombe Street, Leeds, LS1 4AX,
United Kingdom. Authorised and regulated by the Financial Conduct Authority, 25 The North Colonnade, Canary Wharf, London,
E14 5HS, United Kingdom (Financial Conduct Authority firm reference number 141282), member of the London Stock Exchange
and the ICAP Securities and Derivatives Exchange. VAT Registration No. 397103051. Banking Services provided by TD Bank N.V.
Incorporated in the Netherlands and registered as a branch in England and Wales under branch registration number BR006780.
Authorised by the Dutch Central Bank (De Nederlandsche Bank DNB Institution Number 481) and subject to limited regulation by
the Financial Conduct Authority and Prudential Regulation Authority (Financial Conduct Authority Firm Reference Number 216791).
Details about the extent of our regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from
us on request. www.tddirectinvesting.co.uk
23

A Guide To Selecting Shares (EGuide)

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TD Direct Investing

Selecting Shares eGuide

This eGuide is intended for educational purposes only and as such

Selecting Shares eGuide

There are many strategies used to decide which shares to buy.

Selecting Shares eGuide

The human influence has been studied and become known

Selecting Shares eGuide

Getting started: idea generation

methods that you can use to draw up your potential investment

Selecting Shares eGuide

Getting started: idea generation

some insulation against economic adversity. Pharmaceuticals,

Selecting Shares eGuide

Getting started: idea generation

expectations can have a major bearing on the direction of share

Selecting Shares eGuide

Getting started: idea generation

7. Top buys and sells

No-one should know a company better than its Directors as

Just as review sites collect personal opinion; published facts

Selecting Shares eGuide

Getting started: idea generation

Some investors also prefer to invest on ethical principles. This

A positive customer experience

Selecting Shares eGuide

Analysis: using company fundamentals

the quality and strength of its management and staff. Similar

Selecting Shares eGuide

Ten key financial indicators

First, take a look at the profit margin. This can be expressed

The figurative description of this ratio derives from the days

Margins are a good benchmark to

Selecting Shares eGuide

Ten key financial indicators

4. Debt and gearing

5. Earnings per share (EPS)

The level of company debt is also a key performance indicator.

Earnings per Share, (EPS), is an important driver of share prices

The level of company debt is also a key

Selecting Shares eGuide

Ten key financial indicators

This is calculated as the dividend paid to investors divided by the

Selecting Shares eGuide

Ten key financial indicators

10. Financial Forecasts

The Dividend Discount Model (DDM)

Selecting Shares eGuide

Selecting Shares eGuide

Analysis: charts and technical analysis

Selecting Shares eGuide

Analysis: charts and technical analysis

If you recognise an upward trend, this may influence your

Overlaying some charts based on market data may help validate

Selecting Shares eGuide

Analysis: charts and technical analysis

There are many more advanced Charting techniques based on

Top down considers the big picture first by assessing the

When selecting shares there are a whole range of different

Investors applying Bottom up pay little attention to comparison

This eGuide suggests that you

Selecting Shares eGuide