First steps on the stock market: how to choose your shares?

Listed stocks represent a risky investment, since neither the value of the security nor the level of dividends are in any way guaranteed. It is therefore important not to start without knowledge. And above all, without method.

How to choose your actions? Stock market ratios make it possible to judge their attractiveness. This is, for example, the level of dividend (the payout rate), that is, the share of profits paid to shareholders.

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The yield of a share, it expresses in percentage the ratio between the dividend and the market price. Therefore, the higher the latter, the lower the return, even if the company is making a profit. It amounts to 2% on average for the CAC 40, which is historically quite low and demonstrates the good level of valuation of the shares that compose it.

However, dividends are not automatic: some so-called growth companies do not pay them and reinvest most of their results. The increase in the value of the company is then reflected in the share price.

Conversely, a company paying high dividends does not have to be put into a portfolio: the dividend yield can simply be the result of a reduced stock price, because investors do not position themselves on its title.

Young shoots and yield values

Another ratio to master: net earnings per share (EPS), which measures, as its name suggests, the amount of profits actually made by the company divided by the number of shares in circulation. The larger it is, the more profitable the company is, even if it does not distribute all of these profits to shareholders. It therefore demonstrates the good health of the company.

This net profit per share is essential to understand another key criterion for investors: the PER, for price-earning ratio. It is the ratio between the stock market price and the profit of a company reduced to a share. On the stocks of the CAC 40 index, for example, the PER stood at 20 on September 3, 2021. The stocks making up this index therefore pay on average 20 times the profits for the year 2020, which represents a level raised.

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The higher the PER, the more expensive the value is in relation to its known benefits. However, this is not a reason to automatically exclude actions with the highest PER: “If you only invest in shares of companies with a low PER, you end up owning only companies that are undervalued on the stock market, explains Bertrand Lamielle, at Portzamparc Gestion. We can accept paying more for growing companies. ” But be careful: if a company with a high PER fails to maintain its results, the sanction on the stock market price could be severe at the slightest bad news.

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