How to select shares

Six common sense strategies, used by successful investors,

to identify shares with potential
Plus, a basic guide to fundamental and technical analysis

One College Square South,

Anchor Road, Bristol, BS1 5HL
www.hl.co.uk

Contents
Pg 3

Pg 4

Pg 12

Introduction
Why pick shares?
What this guide will tell you
Part A. Get the idea
Method 1: Economic cycle
Method 2: Big Themes
Method 3: Scuttlebutt
Method 4: Directors dealings
Method 5: Newspapers and magazines
Method 6: Excessive falls
Get the idea - Summary
Part B. Analyse the Company
Fundamental Analysis
1. Performance (Profit Margin)
2. Sustainability (Gearing)
3. Value (PE Ratio)
Fundamental analysis - Summary

Pg 16

Technical Analysis
1. Trends
2. Support/Resistance

Pg 19

Fundamental or technical analysis?

Conclusion

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Important Investment Notes

Past performance is not a guide to future returns. All investments should be held for the long term as
their value can fall as well as rise, therefore you could get back less than you invested. Unless otherwise
stated investments do not provide the capital guarantees of a deposit account. Similarly any yields will
vary over time, so income is variable and not guaranteed. This is designed as a guide for information
purposes only and is not a personal recommendation. If you are unsure you should seek advice.

May 2015

Introduction
Why pick shares?
In 2008 the FTSE All Share Index fell 33%. It was a
terrible year for shares. However, the share price
of three shares, Telecom Plus, Randgold Resources
and BTG, increased over 50%; pharmaceutical
giant AstraZeneca rose 30%.
In the following year, 2009, the market bounced
back and the FTSE All Share Index increased 25%.
That year 100 shares increased by over 100%.
The lessons we can draw is that in every year
the overall index can mask the performance
of individual shares. Even in a disastrous year
like 2008 there will be some shares that perform
strongly. The challenge for investors is to identify
those shares.

What this guide will tell you

The purpose of this guide is not to say selecting
shares that perform is easy; it is certainly not
without risk. However, it can be a lot easier than
you think.
Success in share investing is not a matter of having
a PhD in mathematics or just looking at past
performance, rather it involves the application of
common sense and a disciplined approach. This
guide aims to tell you how to get started with this.
Before you go any further you should be fully
aware of the risks of investing in shares. Whilst
there are always shares that outperform the
market, there are also those that significantly
underperform. Risk and reward go hand in
hand, no matter how confident you are about a
particular share, you must be aware that they can
fall in value, and you could get back less than you
originally invested.
When you think about buying shares, but you
dont have a particular share in mind, you need
some ideas for which companies to buy.
Where do you find these companies?
Thats what the first part of this guide is about
it lists six different methods used by successful
investors to identify interesting shares. This is not
an exhaustive list. You can use some, all, or none
of these methods, they are just here to give you
some ideas and a simple starting point.
Having found one or more possible shares to
invest in, you may wish to take a closer look
at each company to see if it will make a good
investment. The second part of this guide explains
how to do this with a set of simple analytical tools.
Lets get started.

PART A
Get the idea

Six methods for finding attractive shares

Method 1. Economic cycle

Over time the economy goes through periods of
growth and periods of contraction. This economic
cycle is natural and has recurred throughout
history. This cycle can be very useful to investors.
However, it should be noted that the economy
and the stock market do not move in tandem.
This is because the stock market is usually seen
as anticipating changes in the economy. If, for
example, the economy is expected to accelerate in
six months time, then investors will buy shares
now they wont wait for this to actually happen.
Therefore, when considering the economic cycle,
investors should take into account that share
prices will generally anticipate changes in the
economy.
The economic cycle allows us to classify shares
into two types:
i). Cyclical shares
Cyclicals are companies whose fortunes are
intrinsically linked to the health of the economy,
increasing their profits and dividends in the good
times but suffering in the downturns.

can buy in comparatively cheaply in the hope of

selling before the economy starts to slow.
Bear in mind that in downturns cyclical shares are
not all hit at the same time - for instance, retailers
feel the brunt of reduced consumer spending
immediately; their suppliers and distributors then
feel the knock-on effect as the shops reduce their
orders; makers of components and producers of
raw materials come into the cycle last.
If you are thinking of investing in cyclical shares,
look for those companies:
with strong balance sheets and little or no debt

When we have to tighten our belts we decide

we can do without luxury handbags and world
cruises. We postpone buying a car and find that
mortgages are harder to come by.

that anticipate downturns or react quickly by

reducing staffing levels, cutting poor selling
lines or abandoning unprofitable markets

It is difficult to judge when the market has hit

the bottom but if you get on the bandwagon just
as it starts rolling i.e the start of an upturn, you

that do not expand too rapidly in an upswing

and thus avoid overstretching their financial and
management resources

 where you believe the fall in the share price has

factored in all the bad news and then some more

selling goods or services that are in continuous

demand

ii). Defensive shares

Defensives are companies that sell pretty much
the same amount of goods or services whatever
the state of the economy. They do not enjoy the
boom times as cyclical shares do but neither are
they set back so badly in tougher times. They are
referred to as defensives because they are seen as
a potential line of defence when share prices are
falling.

with a good geographic spread of markets

The introduction to this guide mentioned

that shares in the pharmaceutical company
AstraZeneca rose 30% in the otherwise dismal
2008. It didnt take a genius to work out that
even in a financial crisis people still need to buy
pharmaceuticals a good example of a defensive
share. It is also a good example of how much of
investing is just common sense.
Of course, no sector is entirely recession-proof.
Supermarkets seem superficially to be immune
from a downturn as we all still have to eat, but
we can switch to cheaper foods and drinks, thus
putting pressure on profit margins. Therefore
defensives can also fall in value too.
One significant difference between the two types
of company is worth noting: defensive shares
traditionally have greater visibility of earnings;
that is they have contracts that guarantee revenue
for months or even years to come. Such companies
generally represent more stable investments than
those living hand to mouth.
If you are thinking of investing in defensive
shares, look for those companies:

with attractive dividend yields (these are

variable and not guaranteed)
The following table gives some examples of the
major cyclical and defensive sectors.

Cyclical sectors

Defensive sectors

Aerospace

Food

Automotive

Beverages

Banks

Healthcare

Construction

Household goods

Engineering and Industrials

Insurance

Media

Pharmaceuticals

Manufacturing

Support Services

Mining

Tobacco

Property

Water

Retailing
Travel & Leisure

TIP
When considering shares to buy, bear in mind
the prevailing stage of the economic cycle. In
theory, when the economy is growing strongly,
cyclical shares have tended to perform well;
while in a downturn defensive shares should
if not perform strongly at least outperform
cyclical shares.

with good visibility of earnings

Method 2. Big Themes

The first method of finding share ideas depended
on the economic cycle; we will now look at a
method that tries to look beyond the medium-term
cycle and focuses on the longer term.
One of the major themes of the 21st Century is
likely to be the continued development of the
emerging economies and the huge expansion
of the middle classes within those countries.
This can lead to many investment ideas. For
example, luxury consumption of cars, fashion,
wines and other items are likely to soar in the
emerging economies leading to strong demand for
companies active in these areas. Other Big Themes
are likely to be the aging population in developed
markets, increasing urbanisation, and the tasks of
feeding the world and powering it. The following

Sector

These are just examples of the type of company

opportunity in each sector, which may benefit
from the themes identified: it may be that
they do not benefit, and this is not a personal
recommendation to trade.
Of course, there will always be a large element
of guesswork with such predictions, but the
investments that do come right can benefit
investors for decades. Within each theme some
companies will thrive while others will fail to
take advantage and get left behind losing money
for their investors. Investments made using Big
Themes thinking should only be made with the
longer term in mind.

Theme

Company examples

Global healthcare spending is set to soar with a combination of people

living longer in developed countries and middle-class consumer
populations growing in emerging markets.

Astrazeneca,
GlaxoSmithKline, Shire

Mining

The urbanisation and infrastructure development within emerging

markets is likely to provide strong demand for resources for a period of
many decades.

BHP Billiton, Glencore,

Rio Tinto

Luxury
consumption

The global middle class is set to expand rapidly as emerging economies

become wealthier. As this happens consumption will increase, especially
the discretionary element where brand names are all-important.

Burberry, Mulberry,
Jimmy Choo

Africa

China is investing billions in Africas resources which will help trade and
economic growth there for decades. But Africa is also growing internally
with a booming middle class that should drive consumption.

Hikma Pharmaceuticals,
Old Mutual, PPZ Cussons

Pharmaceuticals

Method 3. Scuttlebutt
Peter Lynch was a fund manager who believed that
you can turn personal experiences as a consumer
into good investment opportunities. For example,

table lists a selection of Big Themes for the coming

century and an example of the type of company
that stands to benefit.

he liked the doughnuts at Dunkin Donuts and the

beds at a particular motel chain so much that he
bought the shares. It obviously worked for him; he
managed the Fidelity Magellan Fund one of the
most successful funds in history. Lynch said:

Every time you shop in a store, eat a hamburger

or buy new sunglasses youre getting valuable
input. By browsing around you can see whats
selling and what isnt.
This idea of using personal experience to
influence your investing decisions was originally
proposed by Philip Fisher who called the process
scuttlebutt*.
The great thing about scuttlebutt is that all
investors can use it, and their experience can be
just as valid as highly-paid fund managers (who
probably dont get out that much anyway).
Scuttlebutt research is easy. Next time youre in
the high street, see which shops seem to be busy
or those shops that seem rather too quiet and just
generally unattractive. If you fly regularly and find
them nearly always full, perhaps the company is
worth looking at. If budgets are biting and you
decide to stay in a little more frequently and order

Method 4. Directors dealings

Towards the end of April 2010, after a period
when the shares had been gently falling, a C J
Humphrey, C M Brendish, D A Hurst-Brown and
R Amos all bought shares in IT company Anite. A
few weeks later the shares started climbing and a
year later had doubled in value.
The question is: who are these four
people and what did they know?
We dont know what they knew, but we do know
who they are they were all directors of Anite.
Throughout the year there are certain periods

a pizza, perhaps others are doing the same.

Scuttlebutt may seem too easy, but dont dismiss it
this subjective experience can be more valuable
than the seemingly more objective, but academic,
views of analysts and newspaper columnists.
However, this may already be factored into the
current share price.
Stock market research is often based on historical
performance, but your own experiences can show
you exactly whats happening right now.

TIP
The internet offers great opportunities to extend
the power of scuttlebutt research beyond
personal consumer experience to see feedback
from thousands. Obviously, one must weigh
carefully anything on the internet, but it is
certainly a useful additional tool to research a
companys products or services.

when directors are not allowed to buy and sell

shares in their company because they have
access to certain privileged information (e.g. in
the period just before results are announced) but
for the rest of the year directors can deal in their
company shares just like any other investor. The
LSE must be informed of all such dealings and this
information is then widely disseminated.
Some investors closely follow the dealings of
directors, in the not unreasonable belief that the
people who understand a company best are its
own directors.
There are many ways to interpret directors

*Scuttlebutt is an old naval term for gossip or rumour. Sailors would talk around the scuttlebutt (water barrel on a
ship) and this would give them a better idea about life on the ship.

dealings. In some cases, such as the chart below,

after a quiet period director buying activity can
signal that something is about to happen. Note:
Past performance is not a guide to future returns.

In other cases, directors buying after a big fall in

the shares can indicate that the directors simply
believe the extent of the fall is unwarranted and
that the company is still sound.

ANITE PLC (AIE)

78

(p)

73
68
63
58
53
48

Shares bought

43
38
33
28

Sep

09

Dec

09

Mar

10

Jun

10

On 9 November 2011 Admiral shares fell over 25%

following a negative reaction to the companys
third quarter results. Seven directors felt the selloff was overdone and invested a combined 11.1m
in the shares. In the following months the shares

Sep

10

Dec

10

Mar

11

Jun

11

recovered most of their losses from that day, and

in March the company released record profits for
the eighth consecutive year.
This can also sometimes be seen market-wide.

ADMIRAL (ADM)
1500

(p)

1400
1300
Shares bought

1200
1100
1000
900
800
700

Sep

11

Oct

11

Nov

11

Dec

11

Jan

12

Feb

12

Mar

12

Apr

12

View the latest director deals at

www.hl.co.uk/directordeals

In retrospect we can see that after the financial

crisis of 2008 the market bottomed in March 2009
and then bounced back strongly. However, at
the time, in March 2009, it wasnt at all obvious
that that was the bottom it never is obvious at
the time. But an exceptional number of directors
bought shares in their own companies between
January and March 2009. They evidently did not
believe that the level of share prices reflected the

underlying fundamentals of their companies this

was a great signal that shares had been oversold.
Directors dont always get it right. In March 2006
there was a frenzy of excited directors buying
shares in Paragon at a price which turned out to
be a bubble peak for the shares. Their error was
compounded when they tried to double up by
buying on the way down as well.

PARAGON GROUP OF COMPANIES (THE) PLC (PAG)

800

(p)

700
600
500
Shares bought

400
300
200
100
0

May

05

Nov

05

May

06

Nov

06

A few guidelines for interpreting

directors dealings:
Small deal sizes (e.g. below 2,000) and regular
deals are not generally considered significant.
Deals can be considered more significant if there
are many directors dealing at the same time,
especially if this includes the finance director.
While directors buying shares can be seen as a
vote of confidence in the company, the reverse is
not necessarily the case. Large scale sales of shares
by directors can be viewed as negative by the

May

07

Nov

07

May

08

Nov

08

market, as it can signal the directors have less faith

in the company, or indeed that they believe the
share price has risen far enough for now. However,
this is not necessarily the whole picture. A director
may sell shares for many reasons for example,
they may want to raise money to buy a house or
pay the childrens school fees. So it is more difficult
to interpret directors selling deals.

TIP
Directors dealings can sometimes provide
great signals for share price movements. But
remember, the buying signals can be more
reliable than the selling signals.

View the latest newspaper summaries at

www.hl.co.uk/press-reports

Method 5. Newspapers and magazines

point for doing your own research. Having done
your own research you will be better equipped to
know when to sell the shares.

Many investment ideas can be found in the stock

market columns of newspapers, magazines and
online, where theres no shortage of tips, tips, tips.
All this can be useful; however it is wise to bear in
mind a couple of things.

The second thing to be aware of is that when a

share is tipped in the media its price can jump up
immediately, simply due to the increase in buyers,
and may then slip back again as the buying
pressure reduces. This is usually only an issue
with smaller companies which have less liquidity
in the market but it is important to check the
price at the time the tip was released to see what
movement has occurred before you buy; in most
cases this will be quoted in the tip.

First, if you are investing in shares for growth,

then you make money when you sell the shares
(not when you buy them). Therefore, when you
sell is important. However, if you buy a share
solely as a result of a tip and for no other reason
you may not know when to sell it. Because of
this it is important to only use tips as a starting

Method 6. Excessive falls

opening at 168p and closing the day down 19% on

the previous day. A huge fall in one day.

On 12 January 2012 shares in technology company

Invensys closed at 227.1p. The following morning
the company released a statement saying that
its profits for the year would fall 60m short of
expectations. The shares reacted immediately,

That is the danger of profit warnings shares can

react extremely sharply. However, it can also be
an opportunity. Take a look at the following chart
of Invensys shares over this period.

INVENSYS PLC (ISYS)

235

(p)

225
215
205
195
185
175
2/11

12/1

10

2/11

22/1

1/12

01/0

1/12

11/0

1/12

21/0

2/12

31/0

2/12

10/0

As can be seen, just three weeks later the shares

had bounced back to their previous levels. The
market can over-react to profit warnings and the
shares become over-sold. The opportunity here
was to recognise that the shares had been greatly
over-sold and to buy them after they had fallen
19% on the day of the announcement.
A similar behaviour can also be seen sometimes
when companies announce good results. There is
an old stock market adage which says: buy on the

rumour, sell on the news investors cash in on

good news and their selling forces the price down,
which can then create opportunities for the nimble
and level-headed investor.
This method of selecting shares is not without
danger. Sometimes shares fall for a very good
reason and continue falling. The skill is in finding
companies that are fundamentally sound but have
been over-sold in the short term.

Summary
Get the idea
We have listed six different methods for finding
ideas for shares to buy. None of them is necessarily
better than the others. Investors should be like
magpies willing to collect ideas from anywhere.

Once you have an idea for which share to buy,

you should do some basic research to assess the
companys health this is the subject of the next
part of our guide.

11

PART B
Analyse the company

In this second part of the guide we will

look at two different ways of analysing
companies:
1. Fundamental analysis (which assesses
the health of a company through analysis
of the figures in its profit/loss report and
balance sheet).
2.Technical analysis (which analyses the
historic behaviour of the share price).

Fundamental Analysis
When planning to buy a second-hand car, you
might think of three things:
1. Performance. How fast does the car go? How
efficient is it?
2. Reliability. What are the chances of the car
breaking down?
3. Value. Is the seller asking too much?
We are going to look at analysing a company
using the same three criteria (although instead
of reliability, in the case of shares well call it
sustainability). The car-buying analogy is not
perfect, but its good enough to get us started.

TIP
To use fundamental analysis to assess a
company, compare it with companies within the
same sector.

12

1. Performance (Profit Margin)

When analysing a company the first thing we want
to do is to assess whether the company is any
good! Is it making good profits?
One way to do this is to look at how much profit
a company makes for every 100 of goods or
services it sells. This is called the profit margin,
it is usually expressed as a percentage and is
defined as:
profit margin =

net profit
sales revenue

2. Reliability (Gearing)
If the company passes the first performance test,
the next criterion to address is reliability.
There are many ways of looking at this; in this
guide we will focus on the size of a companys
debt. A certain level of debt can be beneficial for
a company, but beyond a certain point there is a
danger of a company being overwhelmed by too
much debt.
To assess debt we will use a measure called
gearinggearing =

total borrowings cash

shareholders equity

Where shareholders equity is the companys total

assets less its liabilities.
Again, the result is usually expressed as a
percentage.
The higher the figure, the more potentially
overstretched the company is. The lower the
figure, the less onerous the interest burden will be.
Gearing goes in and out of fashion. Running up
debts to gear up the business magnifies profits
in the good years but it has the opposite effect in
the bad years. Thus gearing tends to be popular
when the economic cycle turns upwards but there
is a scramble to reduce debt when the cycle turns
down, especially if interest rates are rising.
There is no set level for gearing, nor even a guide
level at which alarm bells should start ringing.
However, investors should consider that different
sectors will typically have different levels of
gearing.
Typically, bankers and lenders have liked to

see gearing of no more than 50%. If gearing is

above this level, investors would have to consider
whether a company would have problems
borrowing more money at reasonable rates.
3. Value (PE Ratio)
We may find an attractive company (one that is
profitable and has low debt), but it will not be
useful to us if the shares are priced very high
because many other investors have already
bought the shares. So, now we need to look at
value. We need to assess whether the shares are
priced cheaply or expensively in the market.
Imagine you are a billionaire and you are thinking
of buying a whole company for 200m, what sort
of profit would you want to see that company
make annually? Perhaps, 20m. 40m would be
better. But if the company was only making, say,
5m would you still buy the company for 200m?
Perhaps not.
If the company was making a profit of 20m, youd
be paying 10 times (200/20) the annual profits to
buy the company. If the company was making,
say 40m profits, then youd be paying 5 times
(200/40). And, if the company was only making,
say, 5m profits youd be paying 40 times (200/5).
This relationship between the value of the
company in the market and its profits is one of the
most important in share investing and is called the
PE ratio, or just PE in most cases. The formula is
usually expressed as:

PE ratio =

share price
earnings per share

How to calculate the PE ratio

When we come to calculate the PE ratio, the share
price is easy to determine - we just look at the
stock market and see what price the shares are

13

currently trading at. But we have a choice when it

comes to the figure for earnings per share of using:
Historic earnings these are the actual earnings
reported in the most recent company report
Future earnings these are the forecast earnings
for the coming year
The choice of which earnings figures to use can
have a significant effect on the calculated PE.
The attraction of the historic ratio PE (i.e. the PE
ratio calculated using historic earnings) is that
the earnings figure is historic fact and easy to
find. The PE ratio will also vary depending on the
share price. Therefore it is important to calculate
the PE ratio using the most recent share price.

14

The PE ratio quoted in the fundamental data of a

company will be based on the share price at the
time of the report.
How to use the PE ratio
The PE ratio is useful as it allows us to compare
the market price of a company with those of other
companies, a sector or the stock market as a
whole.
As a general principle, the lower the PE, the
cheaper the shares are but beware, as there may
be a reason why shares are going cheaply.
The average PE for the UK market tends to settle
around 14 but it partly depends on the outlook for
the economy. Many companies, including sound

Full fundamental figures can be viewed on the

financial section of our share factsheets. Visit
www.hl.co.uk/shares for further details.

ones, were down to single figures in the recession

because investors fretted over whether earnings
could be maintained.
PE ratios differ between sectors. Areas of slow
growth will typically have low PE ratios, while
high-growth areas, will often have high PE ratios.
Investors can use PE ratios to compare shares.
For example, if Company A has a PE ratio of 9 and
Comapny B a PE ratio of 12, one could say that
Company A is undervalued relative to Company
B (if one also believes the prospects for both
companies are similar). However, if one believes
that the growth prospects for Company B are

better than Company A, then it is a case of trying

to quantify how much better they are and whether
Company B deserves a PE ratio 30% higher than
Company A.
Investors looking for share price gains will want
to find fast growing companies. And, fortunately,
its not difficult to find them. The problem is that
in most cases that fast growth will already be
reflected in the high price of the shares (i.e. the
shares will have a high PE ratio). The challenge for
the investor is to find companies whose growth is
not yet fully reflected in the share price.

Summary
Fundamental Analysis
In this section we looked at three ratios used in fundamental analysis. In practice, there are many
more ratios that investors can use the three here were chosen because they are straightforward and
accessible. Please remember, these ratios should not be used in isolation and other factors should be
considered before investing.
Criteria

Ratio

Notes

Performance

Profit margin

The higher the better.

Reliability

Gearing

Gearing can be good when the economy is strong and dangerous when the
economy is weak. Be wary of very high gearing.

Value

PE ratio

High PE ratios can be justified if a company is growing fast. Investors

look for companies where the PE ratio does not fully reflect the growth
prospects.

As investors become more experienced they can use more complex ratios, and those customised to their
particular investing approach.
However, more complex does not always mean better. The key for investors is to use a disciplined
approach that they are comfortable with.

15

Interactive share charts are available free on the

Hargreaves Lansdown website, including
technical indicators and stock comparisons
Technical Analysis

In this guide we will look at two basic concepts of

technical analysis:

Some investors (often called chartists) believe

that an understanding of the past price behaviour
of shares can give a clue to future performance.
Chartists do not believe that all price movements
are random; they believe that prices occasionally
form patterns that can affect how a price will
behave in the future.

1. Trends
2. Support and resistance levels
These can be useful tools but should not be used
in isolation.

Investors should also note that past performance is

not a guide to future returns.

1. TRENDS
Share prices rarely move in straight lines a typical share
price chart displays a series of jagged moves.
However, in the chart below it doesnt take a huge
imagination to see a pattern: the line moves fairly steadily
from the bottom left of the chart to the top right. Drawing

some lines on this chart to highlight the pattern helps.

Although the price has not been moving in an absolute
straight line, it has been moving steadily in a certain
direction within a fairly tight range. The outside straight
lines drawn on this chart are sometimes called trend lines.

CARILLION (CLLN)
500

(p)

450
400
350
300
250
200
150
100
50
0
Jan

03

Sep

03

May

04

Jan

05

This pattern lasted for a fairly long time, almost five years.
Some chartists hope to spot such patterns and will buy
the shares to ride the trend.
A popular saying in these circles is the trend is your
friend. This saying is sometimes extended to the trend
is your frienduntil it ends.

16

Sep

05

May

06

Jan

07

Sep

07

But when does a trend end?

Much work is put in by chartists involving complicated
calculations trying to judge when a trend has ended. At its
simplest, we could say that a trend ends when the share
price breaks decisively through a trend line. The following
chart has extended the period of the chart to January
2009.

We can see that

the break through
the trend line in
December 2007
was the decisive
end of the upward
trend, and the
shares fell afterwards.

CARILLION (CLLN)
600

(p)

500
Linear (Series 1)

400
Series 1

300

Series 2

200
100
0
Jan

03

Jan

04

Jan

05

Jan

06

Jan

07

Jan

08

Jan

09

Trading with trends is one of the most popular strategies for chartists. Whole books have been written on how to spot
trends and the tactics for exploiting them.

2. SUPPORT/RESISTANCE
this level traders will be tempted to sell (in anticipation of
the price falling away again), and their action of selling will
put downward pressure on the price. Other participants
may at least hold off buying the shares near this level
which will lead to weak demand and enable the price to
fall away easily.

Sometimes one can see price levels on a chart through

which the share price seems reluctant to break.

As can be seen, throughout a seven-month period the

share price of United Utilities repeatedly moved up towards a level around 635p and each time fell away.
After a while such behaviour becomes self-fulfilling: as
more traders notice that the price failed to break through
this level before, when the price moves again up towards

This level through which the price is reluctant to move is

called a resistance level.

UNITED UTILITIES (UU.)

700

(p)

650
600
550
500
450
400
Nov

09

Feb

10

May

10

Aug

10

Nov

10

Feb

11

May

11

Aug

11

Nov

11

Feb

12

May

12

17

A similar thing can also happen below the price. Take a

look at the following chart.

Engineering fell repeatedly to the 1800p level, each time

to bounce up off it. This 1800 level is called a support
level. Again, after a while, such behaviour can become
self-fulfilling as more traders notice what is happening.

Over four months, the share price of Spirax-Sarco

SPIRAX-SARCO (SPX)
2050

(p)

2000
1950
1900
1850
1800
1750
1/10

22/1

20/

01/1

12/1

12/1

06/

03/

1/11

17/0

1/11

31/0

2/11

28/

The theory is that after such a range has become

established, when the price does eventually break out
of the range, the price can move decisively further in the
same direction.

Sometimes resistance and support levels can form at the

same time and the price can bounce between them in a
range.
For a few months the Yule-Catto share price seemed
unable to break out of the range 148-180p.

In this case in January 2012 the price broke through the

resistance level of 180p and moved quickly higher.

YULE-CATTO (YULC)
210

(p)

200
190
180
170
160
150
140
11
Aug

18

Sep

11

Oct

11

11

02/

14/0

Nov

11

Dec

11

Jan

12

Fundamental or technical analysis?

Why not do what many investors do and use both?

Strict fundamental analysts would never use

charts. For them, squiggly lines have as much to
do with identifying undervalued companies as tea
leaves or chickens entrails. For their part, strict
technical analysts may think that fundamental
analysis is simply a waste of time, they believe
the analysis has already been done and is already
reflected in the prevailing share price.

For example, having identified a good company,

look at the chart:

So, the question is: should you use fundamental or

technical analysis?
The answer is either, the choice is yours. There
is no right or wrong. Investors who prefer to
take a longer-term view tend to use fundamental
analysis, while shorter-term investors (and traders)
use technical analysis.

1. If the price is currently in an uptrend, this can

act as a signal that now is a good time to buy.
2. If the price is currently in a downtrend, you may
prefer to wait until the trend changes.
3. If the price is trapped below a resistance level,
and could be there for months, you may decide
to wait until the price has broken up through that
resistance level.
4. If the price is sitting on a support level this could
give you some confidence that now is a good time
to buy. Please note there are no guarantees, share
prices can still fall and you could make a loss.

Conclusion
1. Be open to investment opportunities everywhere. This guide lists six methods commonly used by
investors, but dont feel constrained to use only these.
2. Having identified an interesting company, do the research. You are far more likely to succeed if you learn
about any company before you invest in it.
3. There is no right or wrong way of highlighting shares with potential. However, a more structured
approach could improve returns.
4. The most important attributes of successful investors are common sense and discipline.
No method of picking shares gives you a guarantee of success every time. However we hope you are able
to pick more winners than losers if you follow, and build on, the information in this guide.
Important Investment Notes - Past performance is not a guide to future returns. All investments should
be held for the long term as their value can fall as well as rise, therefore you could get back less than you
invested. Unless otherwise stated investments do not provide the capital guarantees of a deposit account.
Similarly any yields will vary over time, so income is variable and not guaranteed. This is designed as a
guide for information purposes only and is not a personal recommendation. If you are unsure you should
seek advice.

19

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Important Investment Notes - Past performance is not a guide to future returns. All investments should
be held for the long term as their value can fall as well as rise, therefore you could get back less than you
invested. Unless otherwise stated investments do not provide the capital guarantees of a deposit account.
Similarly any yields will vary over time, so income is variable and not guaranteed. This is designed as
a guide for information purposes only and is not a personal recommendation. If you are unsure of the
suitability for your circumstances you should seek advice.

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