Learning how to invest in stocks as a beginner can be a daunting task. There are thousands of securities to consider, and no particular strategy or approach guarantees success. However, if you retreat from the swirling chaos surrounding stock markets on a day-to-day basis, you could miss out on opportunities to grow your money over the long term. Simply put, stocks can be scary and you need to invest with caution, but avoiding them altogether might undercut your ability to build savings in a major way.
Fortunately, with so many different options out there, you can find a few strategies that are much safer than the rest. While even “safe” stocks — long considered to be the best stocks for beginners — come with at least some chance of losing money, you can focus on buying ones that will minimize risk while also providing you with the introduction to the stock market you need.
- Getting Started
- What Makes a Stock Good for Beginners?
- Best Stocks for Beginner Investors
- FAQ: Investing as a Beginner
Investing in stocks is important, but it’s also not a good idea until the rest of your financial house is in order. To score some long-term gains, you’ll need a sum of money — one that you’re confident you won’t need to tap into in the foreseeable future.
Pay Off High-Interest Debt
As good as returns from the stock market can be, they’re never going to top the interest rates of your credit cards. Before you consider investing, make sure you’ve paid down any and all high-interest debt. It’s just a better investment in the end.
Build an Emergency Fund
Anything from having a car break down to losing your job can leave you in unexpectedly dire financial straits. If your only remedy is to sell your stock investments, you might end up taking a loss right before the stock makes a big gain, depending on the timing of the stock markets and your emergency.
A general rule of thumb: You should have six months’ income stashed away in an emergency fund so that you can respond to short-term financial needs without having to sell off your stocks.
Choose a Stock Brokerage Account
To purchase stocks, you’ll need to set yourself up with a broker. There are dozens of options these days, including many online brokerages that charge very low fees. What’s more, some apps like Robinhood allow you to buy stocks without paying any sort of commission. So, shop around and compare the different brokerages based on the tools they have available and what sort of fees and commissions they charge.
Determine Your Risk Tolerance
Investing can be very personal. Stock A may provide better returns over time, but if it’s also prone to wild swings, you’ll need to have patience and discipline so that you won’t be tempted to sell the stock prematurely. If Stock B offers lower returns but fewer spastic price gyrations, it could be a better selection for your portfolio.
In the end, the right stocks for one person aren’t necessarily the right ones for you. Take some time to learn more about yourself as an investor before settling on a specific batch of stocks.
What beginners want from their stock investments is pretty much the same as what everyone else wants: the best returns possible for as long as possible. However, where beginners tend to differ from veteran market watchers is in their ability to ride out the ups and downs inherent to owning a stock. Investors will often refer to the “dumb money” that tends to overreact to market swings by either selling early or buying late. Meanwhile, major institutional owners know to wait out those hiccups to continue reaping the much larger, long-term rewards.
Investing In Stocks for Beginners: What To Avoid
The sort of companies capable of posting huge gains are also ones capable of posting enormous losses. So, while you might eventually start branching out, beginners should likely avoid stocks with characteristics that can make them prone to big swings.
Small companies: Firms with a total market value of less than $2 billion are known as “small-cap stocks,” “micro-cap stocks” and “penny stocks.” In each case, these tend to be volatile companies in the early stages of growth. They could provide huge returns if you pick the right one, but many will fail or prove to be bad investments. Sticking to a market capitalization — i.e., the total value of all the company’s stock combined — of at least $10 billion is one way to avoid unstable companies. Clearly, there’s no guarantee (see Enron circa 2001), but it’s one rule that can prove invaluable to beginners.
Cyclical stocks: Certain industries can be notoriously fickle and are typically the first to take a plunge when the economy turns south. Things like consumer goods or cars seem like great stocks when times are good, but they tend to crater in bad markets. Staying away from sectors like retail, consumer goods and tech could save you from potentially devastating losses.
Short interest: Veteran traders and investors can bet against a company’s success by “shorting” the stock. These “shorts” represent people who see issues with a company’s business model and anticipate the stock plunging. Unfortunately, they aren’t always right — in fact, sometimes they’re very, very wrong. However, a company with a high “short float” has a large percentage of its shares held by people who expect the stock to fall. When you’re first starting out, there’s no reason to risk your money — stick to stocks with low short floats until you’re more comfortable with the process.
All investing involves risk, so there’s no guarantee that these stocks are going to perform in the coming years. However, they all have characteristics that qualify them for consideration as the best stocks for new investors. Each one offers a regular cash payment to shareholders (aka a dividend), represents a company worth at least $10 billion, comes from a “defensive” sector and is currently showing high profits based on the assets that it holds.
Amgen Inc. (AMGN)
- Share price: $204.66
- Market cap: $122.74 billion
- Year-to-date change: 7.61%
- 2018 revenue: $23.75 billion
- 2018 net income: $8.39 billion
- Dividend yield: 2.86%
Based in Thousand Oaks, California — right outside of Los Angeles — Amgen is a biopharmaceutical company that develops therapies for various diseases.
- Share price: $53.51
- Market cap: $228.81 billion
- Year-to-date change: 15.7%
- 2018 revenue: $34.3 billion
- 2018 net income: $6.43 billion
- Dividend yield: 3%
Famously one of Berkshire Hathaway CEO Warren Buffett’s favorite investments, Coca-Cola is a good example of a consumer staple that performs well even during economic downturns.
Eli Lilly and Co. (LLY)
- Share price: $109.70
- Market cap: $105.91 billion
- Year-to-date change: -3.62%
- 2018 revenue: $24.56 billion
- 2018 net income: $3.23 billion
- Dividend yield: 2.39%
Indianapolis-based Eli Lilly is a major pharmaceutical developer and manufacturer that sells treatments for both human and animal ailments worldwide.
The Estee Lauder Cos. Inc. (EL)
- Share price: $191.09
- Market cap: $69 billion
- Year-to-date change: 48%
- 2018 revenue: $14.86 billion
- 2018 net income: $1.79
- Dividend yield: 0.89%
Estee Lauder has been a well-known name for years thanks to its lines of makeup, hair care and skin care products.
Merck Inc. (MRK)
- Share price: $85.04
- Market cap: $217.73 billion
- Year-to-date change: 13.55%
- 2018 revenue: $42.29 billion
- 2018 net income: $6.22 billion
- Dividend yield: 2.6%
Among the world’s largest healthcare companies, Merck is a drugmaker with a wide variety of treatments for many different health issues.
- Share price: $136.33
- Market cap: $190.1 billion
- Year-to-date change: 26.17%
- 2018 revenue: $64.66 billion
- 2018 net income: $12.52 billion
- Dividend yield: 2.78%
PepsiCo, the primary competitor of Coca-Cola, is another consumer staple that pays a strong dividend and has a very stable balance sheet.
Stryker Corp. (SYK)
- Share price: $214.95
- Market cap: $80.41 billion
- Year-to-date change: 38.18%
- 2018 revenue: $13.6 billion
- 2018 net income: $3.55 billion
- Dividend yield: 0.98%
Stryker is a medical technology company based out of Kalamazoo, Michigan, that makes a variety of implants and devices, including those used in hip and knee replacements.
Sysco Corp. (SYY)
- Share price: $79.08
- Market cap: $40.49 billion
- Year-to-date change: 29.09%
- 2018 revenue: $60.11 billion
- 2018 net income: $1.67 billion
- Dividend yield: 1.97%
Houston-based Sysco makes and sells food-based products to the food service industry.
Zoetis Inc. (ZTS)
- Share price: $128.71
- Market cap: $61.47 billion
- Year-to-date change: 51.23%
- 2018 revenue: $5.83 billion
- 2018 net income: $1.43 billion
- Dividend yield: 0.52%
Zoetis is a New York-based pharmaceutical company that develops a range of treatments and vaccines.
While taking more risks to earn greater rewards is part of what investing in stocks is all about, easing yourself into the field may be essential to making your experience a positive one. To familiarize yourself with the process, consider sticking to conservative, relatively safe stocks and creating a portfolio of defensive stocks at the beginning. You can always build out your portfolio to include bigger, riskier investments later on. If you decide to start branching out, a solid base can make it easier for you to experiment and take on a bit more risk.
Financial markets can be confusing, so here are some quick answers to some common investing questions.
What kind of stocks should I invest in as a beginner?
There’s never a surefire path to picking the right stock, but sticking to defensive stocks that have low volatility and pay a dividend is a good strategy while you’re still learning about investing.
How much should beginners invest in stocks?
You should only start investing in stocks after you’ve paid off your high-interest debt and built up an emergency fund with about six months’ income. Even then, move slowly so you don’t overcommit — try to make sure that you never have more money invested in stocks than you can afford to lose.
How do I start investing in the stock market as a beginner?
You’ll need to find a broker who can take your orders and buy stocks. Begin by looking at the best brokers to get a better sense of what type of services are available and the sort of costs you should expect.
Which are the best safe stocks to invest in for beginners?
Again, there’s no real answer to that question because you won’t have guarantees in the stock market. However, the best safe stocks for beginners are generally large companies in defensive sectors like utilities, consumer staples (e.g., food, beverages or toiletries) or healthcare. These stocks have a good chance of protecting you from excessive risk.
Do I need a financial advisor to start investing?
Definitely not. While a financial advisor can play a crucial role in building the sort of investment portfolio you’ll need to retire comfortably or send your kid to college, much of the information they provide can be found on your own. If you’re investing limited sums of money, the downside of doing your own research and starting without an advisor is pretty small.
Which is the best app for a beginning stock investor?
Robinhood allows you to buy specific stocks without charging a per-trade commission, making it a great option for beginning investors. That said, there are many different investing apps, each of which offers its own unique set of features and costs. You should take the time to explore your options before settling on one.
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Alexandria Bova contributed to the reporting in this article.
Methodology: The best stocks for beginners were selected using the screener feature on Finviz.com and based on the following criteria: (1) market cap in excess of $10 billion, (2) return on equity over 30%, (3) positive dividend yield, (4) float short below 5%, (5) average analyst recommendation of “buy” or better, (6) located in the United States, and (7) comes from the utilities, consumer staples or healthcare sectors. Market data is from Yahoo Finance, accurate as of market close on Oct. 15, 2019.