How to choose which shares to buy

Choosing shares to invest in can be nerve-racking. There are many options and variables to consider, and no two investors will approach it in quite the same way. This guide walks through the key questions and concepts that can help you make more informed decisions on the ASX, whether you are just starting out or looking to sharpen your existing approach.

We cover six fundamental questions to ask before buying any share, how to think about fundamental versus technical analysis, the difference between growth and value investing, and how many shares you should realistically hold in your portfolio. No single framework suits every investor, but working through these topics will give you a solid foundation for navigating the share market with greater confidence.

Fundamental vs technical stock analysis

When researching ASX shares, you will generally encounter two broad approaches to analysis: fundamental and technical.

Fundamental analysis involves examining a company's underlying financial health and business prospects. This means looking at earnings, cash flow, debt levels, management quality, and competitive position, many of which are covered in the questions above. The goal is to determine whether a company's shares are trading below their intrinsic value, making them an attractive buy. On the ASX, fundamental analysis is particularly relevant for sectors like banking, mining, and retail, where established companies have long financial track records to assess.

Technical analysis takes a different approach, focusing on share price movements and trading volume rather than business fundamentals. Technical analysts use charts and patterns to identify trends and predict where a share price might move next. While this approach is more commonly associated with short-term trading, some investors use it alongside fundamental analysis to help decide when to buy or sell.

For long-term investors, fundamental analysis tends to be the more reliable foundation for decision-making. Technical analysis can be a useful tool to inform timing, but basing investment decisions on charts alone, without understanding the underlying business, carries meaningful risk.

Growth investing vs value investing

Two of the most well-known stock-picking strategies on the ASX are growth investing and value investing. While both aim to build wealth over time, they go about it in different ways.

Growth investors seek out companies expanding their earnings, revenue, or market share at a faster rate than the broader market. They are willing to pay a premium for that growth potential. Value investors, on the other hand, look for shares they believe are trading below what the company is actually worth, aiming to profit when the market eventually recognises that gap.

Neither approach is universally better. Some investors blend both, seeking quality companies at reasonable prices. The right fit depends on your goals, risk tolerance, and time horizon.

	Growth investing	Value investing
Goal	Buy companies growing faster than the market and benefit from their expansion	Find companies trading below their intrinsic value and profit when the market corrects
What to look for	Strong earnings growth, expanding revenue, and a large addressable market	Low P/E ratio, a strong balance sheet, and shares trading below book value or fair value
ASX examples	Technology and healthcare companies with high reinvestment rates	Mature industrials, financials, or resources stocks trading at a discount
Valuation approach	Willing to pay a premium today for future earnings potential	Seeks a margin of safety, buying only when the price is below estimated fair value
Typical time horizon	Long term, often 5 years or more	Medium to long term, depending on when value is realised by the market
Key risk	Overpaying for growth that does not materialise, leading to sharp price corrections	A share can appear cheap for good reason if the business is in structural decline

6 questions to ask when choosing shares to invest in

How each person invests will depend on their personal goals, financial situation, investment strategy, attitude to investment risk, and time horizon. This means individual investors will seek investment options with different attributes. 

Some investors may look for capital growth by investing in growth stocks. Others may chase an income stream, seeking shares with a decent dividend yield. 

Whatever you want to achieve, whether you are looking to invest in Australian shares or international shares, it is worth considering the questions below and how they apply to your investments.

1. Is the company growing its earnings?

Growth in company earnings is one of the most important factors to consider when choosing shares to invest in. Company earnings represent net profit, which is the income earned by a business minus running costs. Earnings growth is a good indication of a healthy and profitable business. 

We can distinguish earnings from revenue, as revenue growth indicates increasing sales. While this is usually a positive, earnings can suffer if expenses increase. Earnings take account of the business's costs, so they are a better indicator of overall profitability. 

When you buy a share, you purchase part ownership of a company. This gives you the right to share in the company's future profits. If earnings are growing, returns to shareholders should increase in the long term. 

Earnings growth is often reflected in a rising share price. The price of a share in part reflects the current value of future cash flows accruing to the shareholder. If earnings are growing, shareholders should be in line for more significant cash flows. This, in turn, means an individual stock is likely to be valued more highly by the share market.  

2. Is the company generating cash?

A business needs cash to survive and thrive. Cash flow refers to the inflow and outflow of money. Funds flow in as revenue and out as expenses. 

Positive cash flow indicates a company has money left over after paying its expenses. This is a good sign, as it allows the business to invest in new opportunities and even return capital to shareholders through dividends or share buybacks. Negative cash flow indicates the liquid assets of the company are being eroded. This could be cause for caution, as a business will be considered insolvent if it cannot pay its debts.  

Cash flow differs from earnings and profits. A business could record profits but still have trouble paying its debts if money is tied up in illiquid assets or accounts owing. Alternatively, a company could see strong cash flow but no corresponding profit increase if expenses rise or it has significant debts to service. 

This means it's important that investors monitor both cash flow and earnings. Cash flow allows companies to manage debt, invest in growth, and pay dividends. Companies may be able to borrow or raise capital to fill short-term gaps in cash flow, but they cannot survive forever with insufficient cash flow. 

3. How much debt does the company have?

Debt can be a good source of capital to fund growth, but too much debt can quickly become crippling if things don't go to plan. Debt financing allows businesses to leverage small amounts of money into much larger sums, enabling rapid growth. Interest payments are also generally tax deductible. 

However, companies with debt need to generate cash to service that debt. Interest payments must be made regardless of the company's actual cash flow, which can be risky for businesses with inconsistent cash flows. 

A company carrying a large amount of debt may have less ability to withstand a downturn than a company with less debt. This is because interest payments will have to be made even if revenues or cash flows decline. Where a company carries debt, it must be able to service that debt.

4. What is the share's P/E ratio?

A stock's price-to-earnings (P/E) ratio is its share price divided by its statutory earnings per share (EPS). The P/E ratio measures the relative value of a company's shares. At a basic level, it reveals the price the share market is currently prepared to pay for a particular company's earnings. 

Investors can use this to compare different companies in the same industry. For example, if Coles Group Ltd (ASX: COL) had a P/E ratio of 21 and Woolworths Group Ltd (ASX: WOW) had a P/E ratio of 29, Coles would be 'cheaper'. This is because you have to pay less for each dollar of Coles earnings than for each dollar of Woolworths earnings. 

But the ratio has limitations – it doesn't work well for newer companies and those not yet generating earnings. Companies with high P/E ratios, such as growth assets, tend to be those investors expect to grow their earnings in the future. Amazon.com, Inc (NASDAQ: AMZN) is a classic example — it has traded at a P/E ratio above 1,000 in the past. 

5. What is management's track record?

At its core, a company is a bunch of individuals working toward a common goal. This means management has a strong ability to influence future direction and profitability. Therefore, the quality of a management team is an essential consideration for the investor. 

Leadership value can be difficult to evaluate given its intangible nature, but it is worth investigating. Management makes strategic decisions and is in charge of creating value for shareholders. Many investors like management to have 'skin in the game' in the form of equity interests in the company. This can help align management interests with those of shareholders. 

Where possible, it can help to examine management's record of returns. One way to do this is to calculate the return on investment of a manager or management team. Return on investment is a profitability ratio that calculates an investment's return relative to its cost. 

Management at Amazon has been able to generate consistently strong returns on investment by operating under a compensation system that closely aligns its interests with those of shareholders. Bonuses are paid exclusively in equity, which generally has a longer-than-usual vesting period. Similarly, the company has opted to reinvest earnings at a high rate of return, increasing overall shareholder value. 

6. Does the company have industry tailwinds or headwinds?

If you're investing long-term, it's worth taking a broader view of your potential investments. You'll need to consider the future prospects of the industries in which your selected companies operate. Is the industry growing or shrinking? Is your investment option an innovator and market leader, or subject to strong competitive forces? 

These factors will all help shape your asset's future performance. Companies operating in growing industries are more likely to experience growth-related tailwinds that will boost earnings (and potentially the stock price) over the long term. Those in shrinking industries must scramble for market share to grow.  

Companies can also benefit from internal tailwinds, such as a future-proofed culture. Innovative companies that are leaders in their markets tend to benefit from barriers to competition that enhance performance over the long term. 

On the other hand, headwinds provide barriers that companies must overcome on the path to profitability. Regardless of your investment goals, these factors are worth considering when making stock investing decisions. This will help you make an informed assessment of future performance prospects.

How many shares should I buy?

There is no single right answer, but diversification provides a useful starting point. Most experienced investors suggest holding between 15 and 20 individual ASX shares to spread risk without making the portfolio difficult to monitor. Fewer than five or six can expose you to significant concentration risk, while too many makes it hard to stay across each company's performance.

If you are just starting out, beginning with a smaller number of well-researched companies and building from there is perfectly reasonable. A broad-market ETF is also worth considering, as it provides instant diversification across the ASX 200 or ASX 300 in a single holding. Either way, every share you hold should be there for a reason — a portfolio of eight well-understood companies will almost always outperform one with 30 holdings you have not fully researched.