I’m a stock-picker, here are my five rules for investing: JOANNE HART

If you want to invest in shares, the immense choice in Britain alone can be bewildering.

There are more than 1,600 individual company shares listed on the London stock market, ranging from giants worth hundreds of billions like drugmaker AstraZeneca and bank HSBC to tiddlers worth less than £1million

With such a wide range, selecting what to buy, when to buy and how to buy can seem a daunting task.

In some ways, owning shares has never been easier. Investment platforms, such as Hargreaves Lansdown, AJ Bell, Interactive Investor and newcomers like Trading 212, are designed to make investing simple.

Would-be investors can open an account within minutes and start buying stocks almost immediately.

But there is a dizzying array to choose from. And it’s not just UK-based companies but shares from all over the world.

So, what do you need to consider before you take the plunge? These are my tips gleaned from decades of covering the stock market, including stock-picking for This is Money and the Mail on Sunday’s Midas Share Tips column.

Golden rules: Joanne Hart, pictured, invests in firms that are well managed and will talk to company bosses at length before recommending their shares

With so much economic uncertainty, it can feel harder than ever to take the plunge and put your hard-earned cash into stocks and shares.

So why bother? Investing in the stock market is designed to help companies grow and investors to make money.

Returns can come in two ways – through rising share prices and through dividends, where firms distribute cash to shareholders every year as a reward for owning stock.

Younger companies often plough all their spare cash into future expansion so they may not offer dividends. Older, more mature businesses are different and many pride themselves on generous dividends to investors.

Know what to look for in a company 

Midas tries to help investors choose shares that will generate returns over the long term, either through increased share prices or dividends or both.

We look for companies that share certain characteristics.

First, they are well managed. We talk to company bosses at length before recommending their shares. The best ones can explain what they do clearly and simply, they are enthusiastic about their business and have a clear strategy for growth.

Second, they offer products or services that customers want to buy. We live in a fast-moving world but the best firms adapt or pre-empt change, making sure their goods have ongoing appeal.

Third, they are either delivering rising sales and profits or have a well thought out plan to do so. Firms that are developing new drugs, new technology or new mines can soak up a lot of cash in the early days. 

But if they can’t explain how and when they are going to start making money, they are likely to be highly risky investments.

Fourth, they are keenly priced. Stock markets are supposed to reflect a company’s value but they do not always operate as efficiently as they should.

Many US shares seem overpriced these days, while many in the UK seem overlooked and undervalued. Often, the best opportunities can be found in those types of shares.

That does not mean investors should only look for shares that have been on a losing streak. Rather, that shares which have been racing ahead may offer less upside than those which have been producing strong sales and profits but remain unloved by investors.

Understand how to value shares

Judging value is extremely hard. In the past, market professionals would look at a share’s P/E ratio, that is the price of the share divided by its earnings per share.

If a share was trading at £1, for example, the company was making £5 million profits per year and there were 500,000 shares in issue, earnings per share would total 10p and the P/E ratio would be ten.

In the UK, the average P/E ratio is 14.3. In America, the P/E ratio on the tech-heavy Nasdaq is more than 36.

And some companies make no money at all but are valued in billions of dollars because investors think they will deliver huge growth over the long term.

The spread of companies and valuations makes one point abundantly clear. For anyone wanting to dip a toe into the market, it is really important to spread your risk.

Shares in America’s so-called Magnificent Seven – including Amazon, Microsoft, Tesla and Google-owner Alphabet – have rocketed over the past few years, tempting many investors to put all their cash in these stocks. 

But sky-high valuations can make shares vulnerable, as they are priced for perfection and if that doesn’t come, prices can take a tumble.

Spread your risk

Seasoned investors will tend to buy shares in a range of companies, differing in size, profitability, maturity and industry.

The UK market boasts plenty of stocks from traditional sectors, such as oil and gas, mining and finance. But there are also small, cutting-edge businesses creating new ways to use technology or pioneering treatments for cancer or heart disease.

Midas hopes that investors will pick and choose a selection – some big, some small, some paying generous dividends, some focusing on growth, some delivering steady profits, others expected to change the world, or at least their part of it.

Dividends can make a material difference to overall returns, especially if, instead of taking the money, you invest it in more shares, a process known as compounding.

Invest don’t trade

Investors should also think about how long they are prepared to hold a share.

Short-term buying and selling is all about timing dips and rallies. That may seem exciting, but it is defined as trading rather than investing – and it is high-risk.

When you buy shares, you are acquiring a slice of a company – in effect, you are an owner in that business – and the best results are normally delivered over several years.

That does not mean holding onto all your shares forever. Knowing when to sell is as important as knowing when to buy, and often even harder.

If a stock is going up, most people want to keep on owning it. If the price is falling, no one wants to make a loss. It’s worth keeping in mind that old stock market adage ‘No one ever went broke taking a profit.’

In other words, if a stock price has risen and made you money, you might be better off selling it and banking that cash.

Midas often recommends selling at least some shares once a price has gone up. That way, you put some cash away, but you can also benefit if the share continues to rise.

Don’t put all your eggs in one basket

It is important too, not to put all your money into shares. Prices can go down as well as up and over-exposure can leave you vulnerable.

How much you invest in stocks, also known as equities, depends on a host of factors, including how close you are to retirement, what else you are invested in and how much you can afford to lose.

Again, therefore, diversification is key – buy some stocks but also invest in bonds, investment trusts and funds and, perhaps some less usual assets such as gold.

Crucially too, keep some of your money in cash so it is ready and available should you need it.