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This week: understanding shares

MANY of us are intimidated by the City and the Stock Exchange but really it's just a giant shopping centre offering shoppers the partial ownership of around 2,000 British businesses. Instead of buying a jumper from M&S, you buy a portion of M&S itself.

Buying a share makes you a part-owner of that company. This means you have a share in the profits and the losses and a vote in big company decisions.

The to-ing and fro-ing of share prices as people value companies differently at different times is what makes up the "market". The major share prices from the previous day can be found in the Financial Times and other daily newspapers. If you are hooked up to the internet, you can get share prices with a 20-minute delay.

How to decipher share price information

Companies aren't arranged alphabetically but by type of business: alcoholic beverages, banks, retail, breweries, pubs and restaurants and so on. This system makes a lot of sense as it is simple to compare companies in similar industries.

Let's take Glaxo Wellcome as an example. This is one of the biggest pharmaceuticals companies in the world and a solid FT-SE 100 performer. Its listing under pharmaceuticals looks like the reproduction in the box above.

Starting from left to right, we have the company name. Then come the notes. If you look at the bottom right-hand side of the newspaper page, you will see that these symbols mean the Glaxo Wellcome company report can be ordered free from the Financial Times report service and that earnings used to calculate the p/e ratio (explained later) are based on preliminary company results.

Then comes the price: 1,681xd. This is the price in pence at the close of trading on the previous day. Now "xd": this refers to the fact that if you were to buy this share now, you would not be in line for the upcoming dividend payment.

Dividends are payments companies make directly to their shareholders. Companies like Glaxo Wellcome pull some money out of their flow of earnings and use it to encourage shareholders to hold on to their shares for the longer term. The year's dividend is paid in two halves, six months apart. If you buy Glaxo Wellcome today you won't be eligible to receive the next dividend payment - it's xd, remember. This is to stop people buying in just before the dividend payment is paid, scooping the cash, and then selling just as quickly.

The next column (+ or -) shows how many pence higher or lower the share price closed compared with the previous day. In this case it was a mere penny up.

But looking at the 52-week high and low of the price, we can see that, over the past year, Glaxo Wellcome has fluctuated between 885.5p and 1,983p. This has been an exciting ride! Currently it is almost double its lowest value. It's easy to think that at 1,681p, far closer to its 52-week high than its 52-week low, Glaxo Wellcome is looking expensive. Fiddlesticks! While many people are leery of buying shares near their high, you shouldn't make that an instinctive response. You will come to notice that the shares of winning companies fairly consistently score new highs, from one decade to the next.

Next, the volume of shares traded on the Stock Exchange that day: 5.5 million, a lot. This is a popular share.

"Yield Gr's" stands for "Yield Gross". Take the dividend Glaxo Wellcome is paying for the current year, divide it by the current share price and multiply it by 100 to give the percentage. That's the yield, or the dividend yield, as it is called.

0r, 2.1 = dividend divided by 1,681 x 100.

So the dividend on each share is 35.3p. This is the gross dividend. Why do we care about dividend yield? It tells us what percentage growth we can expect from the share if it does not rise or fall at all that year. In this case it is only 2.1 per cent, which loses to inflation, to a deposit account and just about anything else. Clearly investors are not buying on dividend alone. They hope Glaxo Wellcome will increase earnings by selling more and better drugs next year, and as a result the share price will grow.

The final column is the p/e ratio. P stands for the company's share price and E stands for the company's earnings per share. This ratio compares the company's share price to its trailing 12 months of earnings per share. Glaxo Wellcome has a p/e ratio of 32.3 on the day in question. The current price is 1,681p, giving us earnings per share over the last 12 months of 52p (32.3=1,681 divided by 52). Investors in Glaxo Wellcome are prepared to pay 32 times what each share has earned in the last year for their shares. Just how much investors are prepared to pay for a particular company depends on a whole range of things. The prime factor is the estimates of the potential growth in earnings provided by the analysts who follow the company. These people are paid by large financial institutions to eat, sleep and breathe the companies they follow.

Broadly speaking, the higher the p/e ratio, the higher the expectations the market has of that company.

Extracted from the 'Motley Fool UK Investment Guide' by David Berger with David and Tom Gardner, published by Boxtree at pounds 12.99. Copyright David Berger, David and Tom Gardner 1998. To order a copy with free postage, call 0181 324 5522. Find out more on the internet at www.fool.co.uk

Next week: how to spot a good share.

Company Notes Price +or- 52-week Volume Yield

high low '000s Gr's P/E

Glaxo Wellcome 6q 1681xd +1 1983 885.5 5,539 2.1 32.3