Personal Finance: Share Clubs - Learn to roll with the ratios

In our regular series, David Stevenson recounts the fortunes of the Reservoir Dogs Share Club, whose members are trying to make money by following an adventurous investment strategy. This month: tips on understanding City jargon.

Everyone who trades shares needs to make some sense of the numbers and percentages spewing out of the financial pages of the newspapers. Here's a friendly guide.

Price/earnings ratio. This sounds confusing and it can be hard to get to grips with the concept. Very simply, it is the ratio between the company's value on the stock market and its profits (or earnings as they are called). Let us say UK plc is valued at pounds 100m. It makes profits of pounds 20m a year. Its ratio is five. Most are well into the mid-teens. But in unfashionable share sectors such as engineering you can find plenty of companies with unbelievably low ratios. But be careful - this year's profits could be next year's huge losses as recession bites. P/e ratios of zero are (unsurprisingly) not popular.

Dividends. My granny used to witter on about dividends, and as a child I thought she meant the Co-op divvy, but it seems she was smarter than I realised. Dividends are payments made to you, the investor, from profits - a bit like a risky version of interest on your savings account. There are plenty of companies yielding dividend rates of 7 or 8 per cent. You can make a decent income but also stand the chance of a capital gain. But think about it first. If those profits dry up, where will the money come from for dividend payments?

Highs and lows. A simple idea with massive implications. Most newspapers will give you the high and low values of a share over the last year. It has not escaped the attention of many highly paid analysts that if the price of your share is still near its yearly high, it will probably have a long way to fall. As a rough guide, many shares are trading at their annual lows - with much further to fall.

Net asset value. Somewhere in a darkened room someone has added up the assets of every company, subtracted all the debts, worked out the net value of the company and then divided it by the number of shares issued. It is one of the few indications of what your company is worth away from frothy stock markets.

Net cash/gearing. By many analysts' reckoning perhaps the key measure of the moment. Gearing means debt. If UK plc has debts of pounds 150m and its value is still pounds 100m then its gearing is 150 per cent. Debts can kill companies if recession begins to hurt. It doesn't matter what the company does as too many debts wipe out your investment. Equally many companies love money. They do away with their debts and have huge bank balances, not necessarily a reassuring sign as it makes one wonder why on earth the company is bothering to be in business at all. But in a recession, cash is king.

The easy way to sort your way through this maze is to get a bit of computer software. There is plenty of choice but our share club felt there were two clear leaders.

Fairshares is a portfolio management program. You pick some shares you want to feature in your portfolio, then examine the shares in greater detail. You can look at the share's price history, examine the basic profits and losses, even analyse your portfolio's profits and potential tax bill. At pounds 79.99 for the basic package (01703 660111) it is great value.

Investorease (01622 747578) is a database of useful information. Unlike Fairshares it is not a system for managing portfolios (though an upgraded version is promised). It gives you a CD-Rom (updated by e-mail) with every bit of company information notified to the Stock Exchange in the last five years. This is standard on the basic package of pounds 9.75 a month.

If you feel confident crunching huge amounts of information then Investorease is for you, although you pay pounds 10 a month, year on year. Fairshares is cheaper over the long term and easy to use. If you want more detailed information then it becomes more expensive.

Either choice equips you to analyse and track shares almost as well as the professionals.

which shares has the club chosen?

The Reservoir Dog share club's first investment, Hong Kong and Shanghai Bank (HSBC), plummeted nearly 15 per cent in value after we bought it. Undeterred, we decided to have a look at some more bargains for our next buy.

We invited a fund manager and analyst to be our first guest speaker and she defended Hong Kong in particular as a place where bargains abound. Take China Telecom. It has got all the most lucrative franchises for selling mobile phones in China. Handily, one of its main shareholders happens to be the main state phone monopoly.

No one is suggesting that China is as rich as Europe but the real killer is that China might just decide not to bother with building a network based on wires and cables and go straight to a telephone network based on mobiles.

Dickson Concepts demonstrates a rather more mundane form of bargain. This company has a range of investments in retailing, not least Harvey Nichols. Unfortunately for Dickson it is also the Far East's leading retailer. Let us just say that being a shop owner over there is not going to make you very rich.

But shoppers change, and two or three years down the line they'll be back. In the meantime Dickson is sitting on the mother of all cashpiles - its share value is only a fraction higher than the value of all the money. Add in Harvey Nichols and you have a bargain.

Despite the expert advice, we picked a bargain closer to home. Oxford GlycoSciences (132.5p) specialises in a rather obscure but potentially lucrative form of drug development technology. It also, rather sadly, has a division that develops drugs. A few years ago it must have seemed a real wheeze. Make money out of specialist technology and invest it in drug discovery.

Unfortunately, timing is everything, and Oxford got it wrong. It floated in the spring and within days its shares started a long descent into hell. But hidden within the company is a form of technology that is world beating. Dump the drug development stuff and you have a gem. Or so the theory goes. We'll let you know how the shares perform.

Do you want to set up a share club? The first step is to buy Proshare's Investment Club manual. Readers of this column can get the manual for pounds 20 including postage (usual price pounds 25). Details on 0171-394 5200.