Factors that influence a Company's share price

I have long been interested in what makes a share price tick, but often wonder if as a very small private investor we have all the tools available to us to make informed decisions about the best shares to purchase?  In the current climate of low interest rates, I’ve heard it said that more private investors are turning to the stock markets in order to boost their returns.  This is not a problem in itself, but I do hope that these investors are taking account of the old adage, “only invest what you can afford to lose”.  In a bank or building society at least your capital is protected up to the value of £85,000 per institution, but there is no such guarantee with a share purchase.  You are effectively at the mercy of the directors running the company being able to maintain its earnings, and, confidence in order to pay dividends, and, create a stable share price.  I am going to try and educate myself to become a better stock picker, and, there are I believe many parameters that influence an overall decision, but in the first instance I am going to start with the factors that influence whether a share is a fair price. 

After many hours of deliberation I am basing my share price valuation on the acronym “FFS”.  This stands for Fundamentals, Forecasts, and, Sentiment.  I chose these letters because they also stand for another common phrase “For F**ks Sake”.  Not a sentence we should be repeating out loud, but I am sure one which may have been muttered under your breath, when you have just purchased a share, and, seen the price plummet for reasons you cannot comprehend!

So I am going to first briefly look at each part in turn, and, try an assess whether as private investors we have the tools for the job, but bear in mind that this is an initial stab at my thoughts, which I am hopefully going to develop as time goes on:

Fundamentals – This relates to the current state of the company.  How much is it earning?  How much is it paying out in dividends?  What are the extent of its assets and liabilities?  The answers to these questions can all be found in the company’s financial statements which are published twice a year (an interim, and, final).  The final annual report is often a lengthy piece of non fiction.  What you have to remember about the numbers contained in these documents (apart from any forward looking statements) is that they are based on historical information.  The revenue account reflects the income and expenditure over the last year, with the balance sheet being the state of the company’s assets and liabilities at the end of one day in history.  So to what extent can you rely on these figures as investment determinants?  An historical look to see if the company has grown its earnings, and, dividends over a number of years gives an indication it may continue to do so in the future, but nothing is guaranteed.  If the company has assets in the form of cash, and, property, then you may think that the tangible nature of these items may underpin a share price, but in a worst case scenario of liquidation, how quickly would the cash last after fees, employee remunerations, etc, and, would any property actually realise the carrying value in a company’s accounts?  

Forecasts – This must be one of the most important factors.  The price of a share must relate to its earnings ability going forward, but how much actual information is available to the private investor?  The directors produce a forward looking statement for the company, but in my experience this provides very little guidance as to future earnings.  In the worst case it may even be ambiguous.  I do not feel that words like “challenging environment” are helpful.  What does that mean?  Are profits going to be zero, or negative?  Why cannot they put numbers instead of words?  At least in that case the shareholders will have something to judge the Directors abilities by to see if they meet the targets they had set themselves.  I am aware that certain analysts produce company forecasts of financial data, which can be up to two years in advance.  Where has this information been provided from?  Is it just the analysts who have used their knowledge, and, expectations of the industry, or, has the company had an input?  If the company has been involved why is this information not included in the forward looking statements for all to see?  Unless a private investor has access to analyst forecasts, then they must have a gap in their knowledge in trying to assess a shares potential.

Sentiment – There are always going to be external factors that come into play, whether relevant or not.  The state of the economy, is a company paying its fair share of tax on profits it earns in a certain jurisdiction?  I think the thing about sentiment is that when it happens it will probably hit you out of the blue.  You can factor in the fairly straight forward questions, and, decide whether a potential investment has the capability to deal with these, but the others you will have to shoulder with the rest of the market.

From the beginning I said that my initial deliberations, where just a starting point, and, it helps to put in writing your thoughts in order to expand on them.  I need to actually analyse some companies in detail using my FFS thought process to see how it works.  Feel free to recommend anything, or let me know your ideas.

As always it is important to do your own research, and, verify any facts.