2.2.2 When do shares offer good value?

Figure 4 How are your shares doing?

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The image is of a businessman looking at the market section of a newspaper.

Figure 4 How are your shares doing?

An investment in shares may be expected to produce a stream of payments, but remember there are some very important differences:

• shares do not have a redemption date
• the amount the investor gets back on sale depends on the market price at that time
• dividend payments are not contractual or guaranteed
• the amount of each dividend may vary.

This means that there are many possible outcomes, depending on how well the company performs, the proportion of its profits paid out in dividends to shareholders, and how the share price performs over the holding period.

Estimating the intrinsic value of shares is the essence of fundamental analysis . In a classic work on the subject, Graham and Dodd’s Security Analysis, the authors (Cottle et al., 1988) define the intrinsic value of a company as: ‘its economic value as a going concern, taking account of its characteristics, the nature of its business(es), and the investment environment’.

Fundamental analysis is an important technique, widely used by people working in the financial services industry. While some personal investors carry out their own analysis, more often they rely on reports and forecasts from stockbrokers, but some understanding of the techniques, ratios and measures used by analysts is necessary to interpret these reports.