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How to pick shares

Share trading is a bit like a game of chess - it's easy to learn the basic moves but it can take a life time to master the best strategies. This guide on how to pick shares can be a useful starting point for anyone who's interested in dipping their toes in the water of the stock market.

Follow the institutional investors: Institutional investors, pension plans and mutual funds have access to expert knowledge and insider information on stocks and shares. Stocks with at least 40% institutional ownership are likely to be a safe bet.

Diversify: In today's volatile economic climate, diversifying is more important than ever. Although it can be tempting to pick shares in burgeoning markets, like China or Brazil, or to pick shares in one booming industry, like energy, it's a good rule of thumb to avoid investing more than 20% of your shares in any one industry or geographic region. This will mean that your eggs aren't all in one basket should the unexpected occur.

Be sceptical about penny shares: There's a reason why some shares are so cheap. It can be tempting to load up on cheap shares in the hope that their values rocket, but in reality this is very unlikely to happen.

Don't try to predict the unpredictable: It's impossible to know what's going to happen to the economy, interest rates or oil prices in the future. Don't make assumptions based on predictions about such factors - whether these predictions are your own or from an "expert". Instead, focus on the fundamental outlook for your stock.

Spot truly profitable stock: A good rule of thumb when assessing a company's profitability in order to pick shares is to assess how it finances growth - through profits or through selling shares or borrowing. Use return on equity (net income divided by shareholders equity) to determine whether a firm is sufficiently profitable to finance growth.

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