As a novice investor, you are faced at first with what appears to be an over-whelming array of choices when you look at the share price page in your daily.

As a novice investor, you are faced at first with what appears to be an over-whelming array of choices when you look at the share price page in your daily business newspaper. There are over 400 shares listed on the JSE, in what we shall call the "Universe of shares".

Your first objective is to create your own watch list. You do this by narrowing your choice down to the top 25% of opportunities (i.e. roughly 25 shares) on the share market by using the process of "prospecting".

(Note: PSG Online allows you to create three (3) watch lists with a maximum of thirty (30) shares in each). It is suggested that you name the watch lists either:•By strategy (i.e. Short term Speculative, medium term Swing Trading and long term Buy and Hold),•By industry (Resources and Mining, Financial and Industrial).

• We have stolen the idea of 'prospecting' for shares from the mining industry.

• You goal is to find those companies that are "gold nuggets" and avoid those companies which are called "dogs".

• To create your own watch list, start the prospecting process by looking for shares that offer good potential (i.e. gold nuggets).

• Remember, that at this stage you are not doing any analysis on the companies and therefore suggest that you make a 'Preliminary Watch list‘ on paper of interesting-looking shares.

• There are four methods that you can start using to help you find interesting-looking shares; They are:

» The Top-Down Method;The Top-Down Method;» Using the Financial Journalism Method;Using the Financial Journalism Method;» The Technical Analysis Method; & The Technical Analysis Method; & » The Fundamental Analysis MethodThe Fundamental Analysis Method

Another way of looking at the Top Down method is called the "General to the Specific Method" or "Funnel Approach".

There is a lot of information going into

the top of the funnel, but we apply certain filter criteria so that only a little bit of information comes out the bottom of the funnel.

We start by looking at the "big picture“ and more specifically what is happening on the International Markets. At this stage, all you want to do is look at the long-term trends in all these markets.

Is the long-term trend moving up or down?

• It is suggested that you use the Wen Professional Plus charting software, to see what the trends are. • Examples of how to understand and research market trends are discussed below:

• The US Markets - Start off by looking at the biggest economy in world, which is the American economy. When we talk about the American economy and the US Markets, we talk about Wall Street and the New York Stock Exchange (NYSE). This is the biggest stock exchange in the world, and has thousands of shares listed upon it. The most important group of shares that you want to follow is called the Dow Jones Industrial average (DJ Industrial). This is the top 30 companies in America, which include MacDonald, General Electric and Boeing. A broader cross-section of the US economy would be the Standard & Poor's 500 Index (SP 500).

• The US economy is the gearbox of the global economy. If things are going well, it means that there is economic growth and jobs are being created. People feel more secure as they have more disposable income and therefore feel more prosperous and they start spending. This has a knock-on effect within the economy and eventually US companies have to expand to meet the demand and even start importing from overseas!

• The Japanese Market - The second biggest economy in the world in Japan. The most important Japanese index to watch is called the Nikkei Index. They have many problems with their financial markets, one being that their share market has been in a downward trend (i.e. bearish trend) for nearly ten years. The economy relies heavily on exported goods, especially computers and motor vehicles.

• The European Markets - The third biggest market in the world is the European Union and within that the German market, which is called the DAX Index, while the French market is called the CAC 40 index. The most important European market for you to follow is the UK market, especially the London Stock Exchange (LSE) and the Financial Times 100 (FTSE 100 Index). Many South African shares, such as SAB Miller, Old Mutual, Anglo American and Sasol, are dual-listed (i.e. they are listed on the JSE and the LSE). More importantly, the UK markets are one of our bigger trading partners. If the British economy is doing well, more South African companies can export to them!

Ask Yourself: Is the long-term trend moving up or down?

The next step is to formulate an opinion on what is happening within those different markets as regards their economic indicators.

• Here we start looking at the affects of a higher oil price (i.e. Brent crude oil) on inflation. • What is the level of inflation in all those different markets? • What is the current trend - up or down? • Most western economies use interest rates as a mechanism to control the level of

inflation.  • What is the current trend with interest rates - up or down?

The next step is to look at the relationship between all the major currencies. • What is happening with the US Dollar against the Japanese Yen or the US Dollar against

the Euro? • Is the US Dollar becoming stronger or weaker?  • What are the implications or a stronger or weaker US Dollar? • What is happening with the Rand against the US Dollar or against the Euro? • What are the implications or a stronger or weaker Rand?

Precious metals, is the next step in your Top-Down method, and here you want to look at what is happening with the gold price, as well as the platinum price?

• Is there an opportunity there?

• Taking all of the above into consideration, you need to decide:

• First of all, look at the trend on the JSE All Share Index.– What is the current trend on this market – up or down? – If you think that inflation world-wide is under control and that interest rates

will either stay at current levels or even move lower, then what industries would benefit from a lower interest rate environment?

– Alternatively, you see that the gold price is starting to move higher and that the Rand is weakening against the US Dollar; you may consider looking at the mining and resource industries.

• Divide the South African economy into the three broad industries, namely: – The mining industry, – The general industry, and – The financial industry.

How does all this affect or impact on the local South African markets?

• If you anticipate a lower interest rate environment - what specific sectors would benefit from that? – You may consider the banking sector, as the banks would be borrowing more

money as people take advantage of lower finance charges. – You may also consider looking at the consumer sector (i.e. retailers, etc.). – If you anticipate that the gold price is looking favorable, then you would zoom

in on the gold mining sector, for example.

• Within the banking sector, you would like at specific shares. • For example, specific banking shares such as ABSA, Stanbank or Firstbank, while in

the retailing sector you would look at Shoprite, PicknPay and Clicks. • The same would apply for the gold mining sector, where you would look at

Anglogold, Harmony and GFields for example.

• The final step is to see if these specific shares would meet your criteria in the share selection checklist that you would use as a comparison benchmark for shares that you think would offer potential.

• In other words, this is your fundamental and technical reasons why.

• The Top-Down Method for finding interesting-looking shares is a very useful method as it is a reliable and safe method.

• Start forming the habit of formulating an opinion for yourself on all those markets. Keep it simple: what is the trend? Is it up or down?

• To get on top of all this information, you will need to read the daily financial Press to be aware of what is happening in the world markets.

• We suggest that besides the information which you can get from the PSG Online website other good sources of financial information include:– www.reuters.com,– www.bloomberg.com – www.money.cnn.com

• Remember, that you want to formulate an opinion and then decide on a specific plan of action.

• You may be wrong initially, but always learn why and then correct your actions.

• This method uses the financial press, such as the Business Day and Business Report.

• Other financial press that you may consider reading would be the weekly publications such as the Financial Mail and Fin Week.

• Skim through the newspaper, for example, and look at headlines for 'bad news’.• Would these companies be recovery situations? • Look for opportunities in the Daily Top Ten Up & Down and Most Overactive

columns, etc.• A word of caution though - beware of "Analysis Paralysis", where you subscribe to

every publication and newsletter, and you start feeling overwhelmed with information.

• Be selective when choosing the resources you use.

You do not make a decision and you do not make money!

• PSG Online’s website (www.psg-online.co.za), as well as many other local financial websites, including www.businessday.co.za, www.busrep.co.za, www.fin24.co.za and www.moneyweb.co.za also offer additional sources of information on interesting looking shares.

• Alternatively, focus on the sectors and individual shares of personal interest to you (i.e. become a 'specialist' and then a 'generalist').

• For example, if you are an engineer, then focus on the engineering sector.

• If you are a medical doctor, then focus on the healthcare and pharmaceutical sectors.

• With whom do you bank with and who are you insurers?

• There are reasons why you like them.  

Once again, you have to do a lot of reading but smart reading!

• This fundamental analysis method means the keeping of a financial diary, in which you would record the financial year-ends of all the companies that may interest you.

• It is suggested that a bi-annual book like the JSE Digest would be useful in providing this information.

• You would then anticipate what their financial results would be by first looking at their past five year performances and then estimate what the results would be like within the current economic climate. Would it be "good" or "better than expected"?

• If you anticipate good results and you believe that the market in general has not picked up on this yet, then you would get in now before the "crowd".

• Remember, the financial results are usually only printed in the financial press two to three months after their financial year end.

• This gives you that short window of opportunity to make some money fast!• Alternatively, we suggest that you use the Research facilities available on the PSG

Online website such as the Value and Quality Filter, which saves a lot of time. • The Filters help to narrow down the choice by using 12 fundamental search criteria. • The Company Analysis is a one page research document on every financial and

industrial share, which provides all the pertinent research information an investor would require to make well-informed investment decisions.

• The technical analysis method of prospecting for shares involves the "scrolling“ through of charts using various technical analysis indicators to find shares that are "oversold" or presenting a buying opportunity.

• This could be very time consuming! • The Wen Professional Plus charting software will help you track the market, as well as

the shares that you may be interested in. • At PSG Online we provide our clients with this software for FREE all you pay is a monthly

Datashare download which comes from the JSE and is the daily closing share prices.

• One of the modules available in the software is called the Hi-Liter Scanner. • For example, you may be looking for shares where the price is trading above its 21 & 40-

day simple moving averages (i.e. the trend is bullish), while the Relative Strength indicator is outperforming relative to the JSE Overall Index.

This monthly cost is R169 (incl. VAT) *minimum 6 month subscriptions.

You would select the Hi-Liter criteria and “scan” a list of shares, looking for shares that will meet specific technical criteria. A list of results will be produced, which will need further analysis and visual confirmation.

Big time saver!

Using the four methods as discussed above, you may come up with a list of interesting-looking shares for further investigation. You may have decided on some shares using the Top-Down Method, some from reading the financial press, some using the fundamental analysis method and some using the technical analysis method. It is this group of shares that you are now going to add into your own watch list.

Step #1 was to narrow down the choice and create an initial watch list (or three) of interesting–looking shares.

Now in step #2, we need to tweak our selection further …

Activity: Ensure that you have compiled your Watchlist in your PSG Online Trading Account before moving onto STEP 2!