Valuing a Stock Part 2

Whether you see your future as an investor or a trader, you will usually have the same goal, which is to increase your wealth. This is why it is sometimes difficult to understand that there are substantial differences between investing and trading. Trading requires your attention much of the time, and certainly if things start moving. Investing is not quite “set and forget”, at least it shouldn’t be just in case the companies you pick do not come up to expectations, but it is much more a hands off activity. The possibilities of great profit tend towards the trading world, but it takes practice, experience, and research to maximize your performance.

You’ll sometimes hear from people who argue that it is impossible to “beat the market”. Called the Efficient Market Hypothesis, there is an argument which has been ongoing since the 1960s which says that, since all share values are based on the information that is available to everyone at the time, then you can’t expect to gain anything by buying or selling. You may buy shares thinking they’re going to go up, or sell shares that you think are coming down, but if the market is working efficiently no one can know if the shares will go up or down from their present levels, and the stock market boils down to a game of chance with prices fluctuating at random. That, or you need insider information which is not easy to come by and probably illegal to use.

Most investors and traders would discount this theory, if only for the reason that they see prices moving in trends, which is clearly not random movement. If nothing else, most observers would accept that over the long term a well-run company in a good market sector will see its shares increase in value for legitimate and well-founded reasons. The driver of fundamental value is the income or capital growth that a company can achieve.

This does not answer the question of whether short-term fluctuations should be considered random, but the world of technical analysis has sufficient credibility that most people recognize a certain predictability in the markets. There is another angle to this discussion of the value of technical analysis. If you have many people throughout the world believing in it, and doing the same kinds of analysis, then it tends to make the analysis correct. For instance, if the majority of analysts decide that the price is going up, then they would tend to buy the shares, increasing demand, which would push the share price up. So even a sceptic would have to recognize that technical analysis must work, if for no other reason than it is self-fulfilling.


I remember my father had a stockbroker who lived in Epsom, Surrey. From time to time he would call up and chat, and give some instructions for share dealings. This was in the laid-back days before electronics changed the pace of our lives. Everything was done in a gentlemanly manner.

Fast forward to today, and the chances are that you will seldom if ever speak to your broker. The broker of yesteryear would be called a “full-service broker”, and literally lived up to the description, with his finger on the pulse of the market, ready to call his clients with stock recommendations based on well-founded rumours and his own research. But the broker you use is likely to be an online discount broker, charging minimal commissions and providing almost instantaneously dealing at the click of a mouse.

It used to be said that the discount brokers provided nothing but a share dealing service, and the absence of advanced facilities justified the higher fees charged by traditional brokers. Increasingly, online brokers have included more information on their sites, many of them offering complete charting software packages in addition to market analysis, so that the days of the full-service broker appear to be numbered if not over.

When you are picking a broker, or any other financial dealer, you need to be wary. “Caveat emptor” must be your watchword. With so much business going online, it is easy for a fly-by-night outfit or even a single operator to appear to be a big company to attract your business. Heck, anyone can even copy entire websites, at least in appearance, so it is difficult to know who you are dealing with. You should take certain steps to check on the background and reputation of anyone you are considering trusting with your funds.

If your broker is in the UK, the Financial Services Act (FSA) was established in 1986, and sought to regulate much of what brokers do. This act was superseded in the early 2000’s by the Financial Services and Markets Act which, rather confusingly, was administered by the FSA, which then stood for Financial Services Authority. But at the end of 2012, there was a new Financial Services Act (FSA) passed which came into operation in April 2013. This abolished the Financial Services Authority, replacing it with the Financial Conduct Authority (FCA). Because it is so recent, you may still see references to the old laws and FSA.

So if you pick a broker who is registered in the UK, you have an easier comeback should they act incorrectly with your account. The added benefit of using a UK broker is that it is easy to telephone them if something goes wrong with your computer or Internet connection, and you need to take immediate action on your trades. Registration in the UK does not mean that you will not have problems with the broker, but it does mean that you have a relatively easy way to take corrective action and will have the law on your side.

But depending what you’re trading, particularly if you get into other markets such as Forex, you may find many offers from companies domiciled overseas. Some of these are large and well-established, and may have set up offshore for their own taxation or lifestyle reasons, so I can’t say they should be avoided at all costs. In fact, the areas where they operate may have their own financial laws which seek to regulate companies functioning there. It would obviously not be as easy for a UK resident to seek legal compensation in a foreign jurisdiction, however.

Perhaps the best choice is to use a broker that has been in business for some years, and you know from personal recommendation. Otherwise precautions include checking with the Better Business Bureau and other similar groups to see if any problems have been reported. You should be cautious about necessarily getting the absolutely cheapest commissions and charges, as a problem broker can cause you untold heartache and suffering.

A final word of warning about selecting a broker. In this connected age, it is common to go online and do research, and also take part in discussion forums. You should be wary of trading forums, as it is well-known that some unscrupulous brokers will go on them and post under different names, recommending their own business. And from the other point of view, you may find an otherwise excellent broker badmouthed by an irate customer who may have had minor issues or even only have himself to blame for making some bad trades. The Internet allows one or two people to make an extensive ripple, if they have a mind to. So it is best to regard comments about brokers that you find online in the same way as you would regard “hot tips” about shares to buy, if they come from people who are not known to you – in other words, disregard them.