Do your spadework before taking the plunge - Spend & Save - Money - The Independent

Do your spadework before taking the plunge

Don't invest on a whim and a prayer. A thorough evaluation of markets, industries and companies will give you a far better chance of maximising your returns and minimising your risks

I well remember listening to a retired bank manager reminiscing about the technique of one investor at his small branch during the 1960s: "I read out the names of shares that were priced at a few pence and he bought them if he liked the sound of their name". So "penny shares" were being bought on a whim.

I well remember listening to a retired bank manager reminiscing about the technique of one investor at his small branch during the 1960s: "I read out the names of shares that were priced at a few pence and he bought them if he liked the sound of their name". So "penny shares" were being bought on a whim.

When ProShare, the organisation that promotes share-based investment, commissioned research into how investors decide what shares to buy, this strategy thankfully did not surface. MORI Financial Services did the research by interviewing shareholders who actively trade.

The findings were interesting. Of all those interviewed, 65 per cent used newspapers and magazines as a source; 37 per cent friends, family and colleagues; 28 per cent the share issuer's own information and 24 per cent TV programmes. Research prepared by analysts was not a response.

This is hardly surprising as investment banks and stockbrokers provide this for institutional investors such as pension funds and insurance companies. The recommendations may eventually appear in the press as tips and informed comment.

So what is research? Trained individuals who study companies and markets prepare it. They examine statistics and other information regarding past, present and future trends or performance. Their reports give recommendations on which shares to buy and sell.

It helps investors make investment decisions as it gives an insight into markets, industries and specific companies. Every investor's objective is to maximise their return and to minimise their exposure to risk. Reading and digesting investment research - whether about a particular market, industry or company - helps achieve this.

Research may be used in two ways. The first is a top-down approach whereby the investor evaluates a market, then chooses an industry and finally a specific company within that market. The second is the bottom-up approach. Here the investor selects a company and confirms his or her findings by evaluating the company's sector and then its market.

Analysts use two approaches in their reports. Focusing on factors such as past and projected performance and the quality of a company's management is known as fundamental analysis. The other, known as technical analysis, is when they examine the performance of a company's shares and the pattern of past stock price movements. Of course what is of interest to an investor is whether a company's stock is likely to rise. Prices generally increase for one of two reasons. Value stocks are considered currently under-priced by the market. By purchasing these, investors hope to profit in the future when the market re-prices the stock so as to reflect the company's true value.

The second reason why a stock price may increase is that it is regarded as a growth equity. An investor chooses to invest in such a company in the belief that its future performance will be strong. If this proves to be the case, the company's value and therefore its stock price should rise.

Investors who carefully research markets, industries and companies are more likely to make the right investment decisions. For a trial period of three months, all investors in the UK have free access online to research from Merrill Lynch HSBC. Merrill Lynch is one of the largest international names in investment services, while HSBC is one of the world's largest banking and financial services organisations.

They formed a partnership in April last year to provide online investment and banking services. The fully transactional website will be launching soon. Meanwhile, in addition to research, www.mlhsc.com currently offers a Learning Centre containing short but highly informative animated tutorials designed for newcomers as well those familiar with investing.

Subjects covered range from the workings of stock markets through to risk-and-return. Guidance is also given on using research. To freely access the research for three months, a quick registration is required. There is no charge for this and no commitment has to be given to become a customer of the service when it is launched.

As one wag once remarked, an analyst who gets it right 50 per cent of the time is considered "best of breed". Although both Merrill Lynch and HSBC's research has won many awards, all research should be used as part of your homework before investing.

Get to know the company in which you are considering becoming an investor by reading its annual report, visiting its website and learning about its products and services.

This, combined with professional research, should result in your investing with intelligence and not on a whim. The website is at www.mlhsbc.com

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

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