What do I need to know before buying shares?

Whether you’re about to buy shares in a company for the very first time or you’re looking to make an addition to your existing portfolio, it’s a good idea to get to know the company first to understand how it makes money and any specific risks associated with it.

Do you know the company?

There are many methods of assessing and selecting shares, whether you’re looking for large caps or small caps, income or growth, or undertaking more complex analysis.

Don’t forget that behind every share price is a company that produces and sells goods or services. A good place to start is with companies that you’re familiar with because it’s important to understand how they make their money.

This might be easiest to achieve with ‘large cap’ companies to begin with, such as those in the S&P/ASX 50, but a well-diversified investment portfolio will have a mix of different asset types.

What is the company’s position in the market?

Think about companies with strong and sustainable value propositions, that provide products or services which are difficult to replicate, at least to the same standard.

A strong market position can give a company pricing power and therefore the ability to maintain profit margins in the long term and continue to grow its earnings.

A good quality company with those kinds of attributes is unlikely to disappear overnight.

Is the industry likely to grow in the future?

If you’re thinking about growing your wealth in the long term then it can help to look for companies that have the ability to do the same thing. Think about companies and industries, and whether or not the goods and services they provide are likely to be in demand in years to come.

Remember that share prices largely reflect a company’s perceived ability to generate earnings and turn a profit in the future.

So if it’s not clear what a company will be doing in a number of years from now, it is very hard to meaningfully assess its value.