How to research a share before buying it in the Challenge

The impulse to buy a share because the name is familiar — or because it was in the news this morning — is one of the most expensive habits in the Challenge. A recognisable brand is not the same as a good investment. Before anything goes into your portfolio, five questions are worth asking. Here is how to answer them quickly, with no financial background required.

Step 1 — Understand what the company actually does

Start with one sentence: what does it sell, to whom, and how does it make money? This sounds obvious, but a surprising number of teams buy shares in companies they could not fully describe. If you cannot explain the business model in thirty seconds, you do not yet understand what you own.

Next, identify the stock market sector it sits in. Knowing the sector tells you what drives the company. An oil producer lives or dies by the oil price. A supermarket depends on consumer confidence and foot traffic. A housebuilder rises and falls with interest rates and government housing policy. The sector is the weather system the company operates in — you cannot predict share price movements without understanding it.

Within any sector, it also helps to know whether the company is cyclical or defensive. Cyclical companies — car makers, airlines, luxury goods — tend to perform strongly when the economy is growing and fall sharply in downturns. Defensive companies — utilities, supermarkets, healthcare — produce steadier returns because people keep buying their products regardless of economic conditions. Both types can belong in a well-constructed portfolio, but for very different reasons.

Quick test: if a teammate asks “why do we own this?” and you cannot answer in two sentences, you probably need another five minutes of reading.

Step 2 — Look at the direction of the numbers

You do not need to memorise a spreadsheet. You need to know: is revenue growing, flat, or falling? Is the company profitable, and is that changing?

Earnings per share (EPS) is the number the market watches most closely. EPS is a company’s net profit divided by the number of shares in existence. A company whose EPS is rising has more money flowing through to shareholders each period. A falling EPS is a warning sign — it means either profits are shrinking or the company is diluting shareholders by issuing new shares.

Where to find it: the London Stock Exchange’s Regulatory News Service lists every official announcement from listed companies. Search the company name and look for “Half-Year Results” or “Full-Year Results.” The EPS line is almost always near the top of the announcement.

You only need to compare two or three periods. Last year versus this year is enough to see a direction. A company with three consecutive years of rising EPS is a very different proposition to one whose EPS has fallen for the past two years, even if both share prices look similar today.

Step 3 — Check how the market values it

Once you know the numbers are heading the right way, ask whether the market has already priced that in. A share can have excellent fundamentals and still be a poor buy if everyone already knows about them and the price reflects nothing but optimism.

The price-to-earnings ratio (P/E) is the quickest valuation tool available to beginners. Divide the current share price by the annual EPS and you get the P/E. A high P/E means investors expect strong future growth — they are paying a premium today for profits they expect tomorrow. A low P/E can mean a genuine bargain, or it can mean the market knows something worrying and has marked the price down accordingly.

The key is to compare the P/E to similar companies in the same sector. A supermarket with a P/E of 25 probably looks expensive relative to its peers; a fast-growing technology company at 25 might look cheap. Context is everything. Checking the sector average stops you treating an absolute number as meaningful when it only makes sense relative to comparable businesses.

This step also protects against buying into an already-crowded trade. A share that has risen 40% in a single month may well reflect all the good news already. The P/E comparison will often tell you.

Step 4 — Read the news the right way

Financial news can look like noise, especially if you are not used to reading it. You are not trying to read everything — you are looking for three specific signals:

• Upcoming results date. If a company is due to report earnings in the next two to three weeks, a strong quarter could move the share price sharply upward. That is a potential Active Portfolio opportunity: you are buying ahead of a catalyst that has not yet happened.
• Profit warnings or raised guidance. A profit warning often sends a share down fast, sometimes by 20% or more in a single day, as the market reprices the outlook. Raised guidance does the opposite. Both are larger signals than routine daily price moves, and they tend to have lasting effects on the share price level.
• Analyst changes. When a major investment bank upgrades or downgrades a share, it shifts institutional money. An upgrade can act as a short-term catalyst; a downgrade can drag a share lower even if nothing else has changed. These are worth noting, but do not follow analyst calls blindly — ask why they changed their view and whether that reasoning makes sense to you.

The simplest approach is to filter the company name on the LSE Regulatory News Service and look at the last four to six weeks of announcements. Most of what you need will be there.

Step 5 — Decide which portfolio it belongs in

Once you have answered the first four questions, the last step is practical: does this idea fit the Active Investor book or the Strategic Investor book? The two portfolios reward different types of thinking, and the same share can be right for one and wrong for the other depending on your reasoning.

Active Portfolio: you are looking for a short-term catalyst — an upcoming results date, a product launch, a piece of news that has not fully played out yet. You are prepared to sell within days or weeks if the catalyst resolves. The Active book rewards speed and attention.

Strategic Portfolio: you are buying because you believe in the company’s long-term direction — a multi-year earnings trend, a strong market position, or a sector tailwind that will take months to play out. With limited monthly trades in this book, each decision costs more, so conviction needs to be higher. A useful test: “Would we still be happy owning this in a month if nothing obvious happened?” If the answer is yes, it belongs in Strategic.

Buying the same share in both books is possible, but it requires two separate arguments: one that works on a short time horizon and one that works on a longer one. If you cannot make both arguments comfortably, keep the idea in one book only.

A simple research checklist

Here is everything from Steps 1 to 5 condensed into a single reference table your team can work through before any buy decision.

Check	What you are looking for	Where to find it
Business model	Explain what the company does in one sentence	Company website / Wikipedia intro
Sector	Cyclical or defensive? What drives the industry?	what-is-a-stock-market-sector
EPS trend	Growing, flat, or falling over the past year?	LSE RNS — half/full-year results
P/E ratio	High or low vs sector peers?	Financial data sites; what-is-a-price-to-earnings-ratio
Recent news	Upcoming results, guidance change, analyst move?	LSE RNS; financial news
Portfolio fit	Short-term catalyst (Active) or long-term conviction (Strategic)?	/rules-portfolio

Twenty minutes per share is a reasonable target. If you cannot tick all six rows in that time, it usually means one of two things: you need more practice reading results announcements, or the company is genuinely too complicated to understand quickly — and that itself is useful information.

Frequently asked questions

How long should we spend researching one share?

Twenty minutes is enough to tick all five boxes. Aim for one sentence on the business model, a quick look at the last results, a P/E comparison, a scan of recent news, and a decision on which book it fits. You are not writing a bank research report — you just need to know enough to explain the decision to the rest of the team.

Where do we find a company’s latest results?

The London Stock Exchange’s Regulatory News Service lists every official company announcement. Search for the company name and filter for results announcements — the headline will say “Half-Year Results” or “Preliminary Results”. Most companies also post these in an “Investors” or “Investor Relations” section of their own website.

Should we research shares the same way for Active and Strategic?

Steps 1 to 4 are identical. Only Step 5 changes. For the Active book, you are looking for an imminent catalyst — something that will move the share in the next few weeks. For the Strategic book, the catalyst can be quieter: a multi-year earnings trend, a sector tailwind, or a company that keeps surprising to the upside. The conviction bar is higher in Strategic because you have fewer trades available.

What if the team disagrees after doing the research?

Disagreement is a good sign — it means you are thinking, not just following a name. Write down both sides: why one person wants to buy and why another does not. If neither side can produce a clear reason based on the five steps, you probably do not know the share well enough to own it yet. Park it, keep watching, and revisit next week.