In our ultimate guide to how to buy shares in Ireland and what shares to buy, we will take you through the basics of what a share is, how to choose which shares are good value and how to buy them. Buying shares in Ireland is almost certainly easier than you think, you can use an Irish financial advisor/broker or through an international online broker.
A share is simply a slice of ownership in a company. Read on to see what this means for share prices.
The right shares to buy are obviously those that will grow in value. Based on fundamentals these should be shares that are cheaper than they should be right now when you forecast out their future profits.
In my view investors should always try to focus on company fundamentals when looking to invest in shares. Ignoring a company’s fundamentals is taking a shot in the dark and leaving everything up to chance, not an advisable strategy for your money.
Read on to see how you work out which shares to buy in Ireland right now.
What is a share anyway? How to buy shares in Ireland
The ownership of a publicly traded company is thinly sliced into equal shares on the stock exchange to make them easier for investors to buy and sell, hence the name for this split in ownership – shares.
Traditionally, companies are priced by each individual share, which leads to the question of what the price of a single share tells investors about the value of a company? Absolutely nothing…
A single share does not tell you anything about the value of a company. Instead, it is the number of shares in the company multiplied by the price per share that gives you the total market value of the company, or the market capitalisation.
A company can be thinly or thickly sliced, but investors should only be concerned by the overall value of a company.
A rookie mistake is to compare one company share price to another, as both companies are likely to each have a different number of shares outstanding. Looking for cheap stocks is similar to comparing the size of two loafs of bread, simply by comparing a slice from each loaf, which would be a strange method for picking out which loaf or indeed company that you would like to own a “share” of.
So if you can’t use the price of a share alone to work out if it is good value what can you use?
Read on to find the key tactics that investors use, to zero in on shares that offer the highest potential for returns.
How do I choose which shares to invest in? How to buy shares in Ireland
There are two text book tactics that investors use to determine the underlying value of a share, Relative Valuation and Discounted Cash Flow. Here’s how they work and the pro’s and pitfalls of each.
Relative Valuation methods are quick and easy. They represent a straight forward way to compare a stock to its own historical price, other companies or to the price of the overall market.
Relative valuations indicate whether a company is over or undervalued, but they do not give a fair market value for the stock. There are two ways to do this relative comparison, Dividend Yield and the Price-to-Earnings Ratios.
Dividend Yield is the amount of money a company pays shareholders as a dividend, as a percentage of its current stock price. The lower the dividend yield, the more expensive the stock.
Yields also depend on the industry the firms in or how mature the company is. Growth companies often decide not to pay any dividends, as the money is instead reinvested into the company to fuel growth. Indeed five of the seven largest S&P 500 members currently do not pay any dividends at all.
Price-to-Earnings (P/E) ratio is the other main relative valuation metric, which depicts a company’s value in terms of its earnings, allowing investors to compare companies of all different types and sizes. Simply put, the higher the P/E ratio, the more expensive the stock.
Determining a fair P/E ratio hinges on how fast you think a company’s earnings will grow. A fast-growing company will warrant a higher P/E ratio, as opposed to a company in decline.
An extreme recent example would be the high premium that investors are currently willing to pay for Tesla, which currently has with a P/E ratio of 998, compared to General Motors modest P/E ratio of 13.
Although you may hear Dividend Yield and P/E ratio bandied about by some on the internet and in social media. These relative valuation tactics are very blunt instruments.
Those looking for something more tethered to the underlying value of the shares often reach for some something known as the discounted cash flow model.
Discounted Cash Flow
The discounted cash flow model involves estimating the future earnings of the firm and then calculating how much the future earnings are worth today. The estimates of the company’s future earnings are discounted because of the uncertainty of the future.
Simply put, investors are willing to trade the promise of a larger sum tomorrow, for the certainty of a smaller sum today. The total value of the firm is equal to the discounted value of the company’s future earnings under this model.
The amount you discount the earnings is the combination of what an investor would be guaranteed by putting their money in a risk free investment (usually the current yield on a US 10-year government bond) plus a risk premium that is based on how probable the future returns are.
The future earnings plus the discount equals the total value of the firm (enterprise value). You then take away the balance if what the company owes in it’s accounts to get the company’s total value.
(Value = Enterprise value – Debt + Cash)
Dividing the total value of the company by the number of shares produces a value for one share. Using this logic, if you can buy the share cheaper than the calculated value it’s a good investment.
This approach provides a direct relationship between the value of a company’s share and its fundamental measure of success, its future earnings.
Momentum plays Fundamentals. How to buy shares in Ireland
Both absolute and relative valuation models rely heavily on the company’s earnings. Indeed how much should a company be worth if it does not have solid earnings? This approach is often called value or fundamental based investing, most famously used by Warren Buffet, the billionaire ‘sage of Omaha’.
In my view investors should always try to focus on company fundamentals when looking to invest in shares. Ignoring a company’s fundamentals is comparable to taking a shot in the dark that leaves everything up to chance, which is clearly not an advisable strategy when looking to invest.
In a nutshell. How to buy shares in Ireland
There are many ways for investors to buy shares in Ireland. It is possible to buy shares directly through one of the online brokerages operating in Ireland, such as DEGIRO or eToro. “Robo advisors” have also increased in popularity, as the digital advice provided requires with little human input.
Speaking to a dependable financial advisor still remains the most advisable approach to investing in stocks. Reviewing your finances with a financial advisor will allow you to see how investing in stocks can help you to achieve your financial goals.
You can check out our other guides on Investing in Ireland here.
You can find out where to get individual investing in Ireland and financial advice in your area here.