The recent surge of interest in direct stock market investing has been highlighted by the initial public offering (IPO) of SpaceX, which reportedly attracted applications from over 100,000 individual UK investors seeking to buy nearly $1 billion worth of shares. This trend toward do-it-yourself (DIY) investing underscores both the potential rewards and risks of purchasing individual company shares without intermediary funds.

Investors who choose to build portfolios on their own often face greater exposure to the volatility of individual companies compared to those who invest through diversified funds. Market experts emphasize the importance of thorough research before investing in specific stocks, noting the necessity of examining a company’s financial health and future prospects by reviewing publicly available data.

Jemma Slingo, a pensions and investment specialist at Fidelity International, advises that financial metrics can help investors pose informed questions but cautions that these figures cannot predict future performance, nor does past success guarantee future returns. Public companies regularly publish financial results accessible on platforms such as Investegate, Yahoo Finance, and Fidelity’s own site, enabling investors to compare data across companies and sectors.

Two key valuation metrics often cited include the price-to-earnings (P/E) ratio and the price-to-book (P/B) ratio. The P/E ratio measures the current share price relative to earnings per share and reflects how much investors are willing to pay for every £1 of profit. There is no definitive “good” or “bad” P/E ratio, as this varies depending on the sector and growth expectations. For instance, the average P/E ratio among FTSE 100 companies is approximately 12. Some investors use a benchmark P/E of 15 to gauge whether a stock is relatively inexpensive, though industry differences apply. Among major UK banks, data shows NatWest’s P/E ratio at 9.52, signaling a lower valuation, while Metro Bank’s stands significantly higher at 22.05.

The P/B ratio compares market valuation to a company’s net assets (assets minus liabilities), showing whether shares are potentially undervalued or overvalued. A P/B ratio below one may indicate undervaluation, although this metric tends to be more meaningful for firms with substantial physical or cash assets, such as banks. Slingo points out that banking stocks were historically viewed with caution due to bad debts and weak loan demand after the 2008 financial crisis and the pandemic, reflected in their traditionally low P/B ratios. However, the sector experienced a “dramatic rerating” in late 2023 and early 2024, with rising share prices despite wider economic challenges, including inflation and interest rate increases.

Individual investors like Aidan, a retired NHS worker from Suffolk, illustrate the potential advantages and challenges of DIY investing. After switching to an investment platform for lower fees and a broader range of options, he has built a portfolio that includes companies such as Hill & Smith, Avingtrans, and Hargreaves Services. These investments have yielded significant returns over several years, demonstrating the importance he places on management quality and independent research, often sparked by financial news articles.

As the popularity of DIY investing grows, experts recommend that potential investors carefully evaluate financial indicators and market context before committing funds, ensuring they understand both the potential upside and the risks associated with individual stock selection.