Experts caution that a company’s past performance may not be a reliable indicator of future returns. Photograph: Hollie Adams/Reuters View image in fullscreen Experts caution that a company’s past performance may not be a reliable indicator of future returns. Photograph: Hollie Adams/Reuters Investments ‘Ask the right questions’: what you need to know before buying shares Whether it is SpaceX or a bank, getting the right facts about a firm can offer vital insights before you invest in it
Prefer the Guardian on Google When Elon Musk’s SpaceX launched on to the stock market , tens of thousands of Britons clamoured to buy a stake, putting the spotlight on DIY investing.
Going it alone and buying shares in individual companies can be rewarding, but also risky. Unless you have a huge amount of cash, you are likely to end up investing in far fewer companies than if you invested in a fund. This means you are more exposed to the ups and downs of those companies’ fortunes.
Maybe you have been putting money into funds for a while and have decided to choose a few individual companies to invest in, or maybe you want to build your own portfolio with no help.
High-profile initial public offerings (IPOs) can often be the catalyst for this: it has been reported that more than 100,000 individual UK investors applied for just under $1bn of SpaceX shares.
But, whatever your background, before you dive in and start buying shares in individual companies, it is vital you do your research. This should include looking at facts and figures that reveal something about a business’s financial health, anticipated returns and profitability. This will help you discover any warning signs about a company’s long-term prospects.
Jemma Slingo, a pensions and investment specialist at Fidelity International, says looking at data can help investors “ask the right questions”, including if they are paying a reasonable price, and whether the returns shareholders are getting look sustainable.
However, she says the numbers “cannot predict the future, and past performance is not a reliable indicator of future returns”.
View image in fullscreen More than 100,000 individual UK investors applied for SpaceX shares. Photograph: John Raoux/AP Listed companies must publish financial results. You can find them on sites such as Investegate, Yahoo Finance and investment platforms such as Fidelity. Yahoo Finance allows you to compare data for several stocks, and a company’s current and past investment data and that of its competitors.
Here is a guide to some of the investment data that can offer vital insights before buying shares in a company.
The P/E ratio measures a company’s share price relative to its earnings per share. It indicates how much investors are willing to pay for every £1 of profit a company makes. The ratio is calculated by dividing the current share price by earnings per share.
There is not “an objectively ‘good’ or ‘bad’ number” when looking at the P/E ratio and it depends on what the company is being compared with, Slingo says.
She says the average FTSE 100 company has a P/E of about 12. While a lower P/E could suggest a stock is cheaper, it does not necessarily represent better value, as it could also indicate weaker future growth is expected, she adds.
“Equally, a higher P/E may be justified if a company is growing quickly and has strong prospects,” Slingo says.
Victoria Scholar, the head of investment at the platform Interactive Investor, says some inves…