Ready to Buy Your First Stock? Try These.
Investing in the stock market is not as simple as going into a store to make a purchase. Buying stocks involves setting up a brokerage account, adding funds, and doing research on the best stocks before tapping the buy button on your broker’s website or app.
If you have your brokerage account set but you’re not sure what to buy first, consider investments that can be good introductions to the world of stocks.
Investing in stocks can be a great way to grow wealth over a long period of time or gain additional income through dividends if invested heavily enough. However, there are risks with all stocks that investors also should consider.
Potential for growth to exceed inflation
Possible revenue from dividends
Option to pivot when market trends change
Satisfaction of finding winning stocks
Potential losses from unpredictable markets
Unpredictable dividend payments
Stress from underperforming stocks
Difficulties identifying winning stocks
Stocks in companies that are strong, longtime market standbys and unlikely to have any major negative news stories about in the near future are referred to as blue-chip stocks. Even if they do face negative publicity, they are old, sturdy companies that can weather the storm. Blue chips are great for newer investors as they tend to move with the market in a predictable way and have lower risk than most other stocks.
A great example of a blue-chip stock is Walmart (WMT). The chain store has a history going back to 1962, has a huge market cap of $236.4 billion, and is relatively stable compared to the market as a whole. With about $500 billion in revenue annually, it holds the number one spot on the Fortune 500 list, as of 2019. Look for other blue-chip investments on the Fortune 500 and other lists of the largest companies in America.
Examples of blue-chip stocks include Coca Cola (KO), JPMorgan Chase (JPM), Exxon Mobil (XOM), Boeing (BA), Caterpillar (CAT), and General Electric (GE).
Value investing is the idea that you can analyze the finances of enough companies and predict fair stock prices, you can find undervalued stocks that look like attractive investments. The approach was made famous by British-born economist Benjamin Graham, a teacher who spent time at both Columbia and UCLA. Value investing is the mantra of many successful investors including Warren Buffett, Irving Kahn, and Bill Ackman. The bible of value investing is Graham’s 1949 book "The Intelligent Investor."
Finding undervalued stocks is not always easy. One of the most useful metrics to look at is a company’s book value per share, which shows the assets of a company compared to the current share price. Website ValueWalk published a Graham-Dodd stock screener that uses value investing insights to find potential investments in this category. Be sure to look out for smaller companies, however, as they are riskier and more volatile than older, stable value stocks. As well, look out for companies that recently have gone through a major price swing, as current news may influence various ratios and valuation methods.
Examples of potential value stocks, as of 2019, include Transocean (RIG), Nelnet (NNI), Navient (NAVI), American Airlines (AAL), Gilead Sciences (GILD), Wells Fargo (WFC), Expedia (EXPE).
Some investors put their money into markets in hopes of increasing share prices over time, but other investors care more about earning cash flow from their investments. If you want your stocks to pay you, dividends are the name of the game.
Dividend stocks typically pay a small cash dividend per share to investors every quarter. On occasion, companies pay a one-time dividend, as happened with Microsoft in 2004 when it paid out $3 per share, or $32 billion, to investors in its stock.
When looking for dividend stocks, look for a trend of steady dividends or growth over time. Dividend cutting is looked upon very negatively by the markets, so any stocks that have cut their dividends in the past should raise a red flag for you as an individual investor. If dividend yields are too high, it could be a signal that investors expect the share price to fall in the coming months. Any stock paying more than 10% should be looked at with healthy skepticism.
Examples of dividend stocks include Verizon (VZ), General Motors (GM), Phillips 66 (PSX), Coca Cola (KO), United Parcel Service (UPS), Procter & Gamble (PG), Phillip Morris International (PM), and Monsanto (MON).
Large companies struggle to grow as a percentage, as they are trying to grow a very big base. Walmart, for example, is unlikely to see double-digit gains in sales since its revenue already is so high. Smaller companies and newer companies are riskier, but they offer interesting opportunities to grow in the near future.
Growth stocks can come out of any industry, but high-tech companies in Silicon Valley and others often have great growth prospects. These stocks can be companies of any size. Larger growth stocks are typically more stable and less risky but provide lower returns than the smaller, newer businesses on the market.
Examples of growth stocks include Netflix (NFLX), Amazon (AMZN), Facebook (FB), Priceline (PCLN), Skyworks Solutions (SWKS), Micron Technologies (MU), and Alaska Air Group (ALK).
Beware of Risky Investments
To avoid major losses, make sure to invest in a diverse portfolio of stocks across multiple industries and locations. Before you buy any stock, review its recent financial performance, analyst opinions, competitors, and the future landscape for the company’s business model. If you think it is a solid business with good management and great prospects, it is a buy. But if you have any worries or reservations, skip clicking the buy button and wait for a safer investment to come along.