Shares: The most important criteria when buying the security

Anyone who looks at the abundance of Swiss stocks and the large differences between the companies quickly feels overwhelmed. But if you proceed systematically and stick to certain rules, the chaos quickly takes shape. The following points are part of the basics before buying shares:

1st review

With the stock valuation, you can assess whether a stock is fairly cheap or expensive. The most well-known indicator is the price-earnings ratio (P/E), which compares the share price and earnings development per share. If the price is growing much faster than the earnings, the P/E ratio will increase, which can be a warning sign for investors. Companies with a faster growth rate usually have a higher P/E ratio than those with an established business model.

However, the P/E ratio is only suitable to a limited extent for comparing shares across sectors. This is because insurance companies and banks have structurally lower valuations than, for example, technology or industrial companies. The combination with other valuations such as the ratio between price and book value (PBV) is therefore important: The share price is compared to the value of a company as it appears on the balance sheet. This key figure is particularly important for financial companies.

2. course history

Future expectations should not be derived from past share price developments. But before investing in shares, it is essential to look at the price development. If a stock has risen to an all-time high at a rapid pace, a correction may soon follow. Price declines can be identified as entry opportunities. If a stock hasn’t really made progress for years, you should be skeptical and ask what could have breathed life into the stock.

3. Sector affiliation

It is more than difficult to keep track of the more than 200 stocks in the Swiss Performance Index. Orientation towards sectors with which one is already familiar is therefore useful. The most important sectors in Switzerland are: health, finance, food, industry or technology. You are much more likely to come across business models that you understand. It is also easier to assess the risk if you know the special conditions of the various sectors.

Companies from the pharmaceutical, food and telecommunications industries can count on constant income, even when the economy is not doing so well. The corresponding shares are referred to as defensive. On the other hand, there are economically sensitive shares from industry, construction or the financial world, so-called cyclical. Biotech stocks, on the other hand, are traditionally very volatile because their chances of success are extremely uncertain. Well-known defensive stocks are Nestlé, Novartis and Swisscom. Adecco, LafargeHolcim and Sika exhibit cyclical behaviour.

4. Dividend

The dividend criterion has gained more importance in recent years due to low interest rates. Switzerland is richly equipped in this respect: numerous companies pay out a large part of their profits to their shareholders year after year. Insurance companies, for example, are able to pay high dividends because their customers pay constant premiums.

The best way to compare payouts is by using the dividend yield (dividends per share divided by the share price). But it must always be seen in the overall context. Because high dividend yields can quickly disappear into thin air due to an unstable business model for the company and price losses. Companies that can consistently increase their dividends over the years are therefore considered to be particularly attractive. The pharmaceutical company Roche, for example, increased its dividend for the 35th time in a row in 2022.

5. Business process

If a share is shortlisted, you should take a closer look at the business process. And the company figures are not just for the present, but for the last few years. In this way, possible trends can be identified and the company’s long-term development can be experienced. For example, the focus should be on debt and changes in liquid assets. If the numbers are not correct, high yields and impressive price swings are of no use.

Stockbrokers are particularly aware of whether a company’s figures exceed or fall short of market expectations. Therefore, the share price reacts negatively or positively. Even after the share purchase, it is therefore important to stay on the ball and follow company news.

6. Emotions

Emotional decisions should actually be avoided when trading on the stock market. But if it is difficult to choose between several equal shares, “soft” factors can also come into play. Perhaps a family member works for a listed company, or are there everyday products that bring special joy? Companies with special dividends in kind can also end up in the depository as collector shares. Logitech produces all kinds of electronic accessories, which are found in many Swiss households, and Lindt & Sprüngli chocolate ends up under many a Christmas tree.

(cash)

This cash article first appeared on August 15, 2018.

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