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 up and funded, 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 time, or gain additional income through dividends (if invested heavily enough). However, there are risks with all stocks that investors 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 longtime market standbys and those that are unlikely to be the subject of any major negative news stories 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 predictably move with the market and have less 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, a huge market cap of $386 billion, and relative stability compared to the market as a whole. With more than $500 billion in annual revenue, it holds the number one spot on the Fortune 500 list, as of 2020. The Fortune 500 and similar lists are great places for new investors to find blue-chip investment ideas.
More 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, if 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 University and UCLA. Value investing is the mantra of many successful investors, including Warren Buffett, Irving Kahn, and Bill Ackman. Any up-and-coming value investors should be sure to read 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. The website ValueWalk published a Graham-Dodd stock screener that uses value investing insights to find potential investments in this category. Proceed with extra caution when it comes to smaller companies, however, as they are riskier and more volatile than older, stable value stocks. Also, beware of any companies that have recently experienced a major price swing—those swings and any recent news events surrounding them could influence various ratios and valuation methods.
Examples of potential value stocks, as of 2020, include 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 seeing stock prices rise, thereby earning them more money when they sell the stock they own. 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 Microsoft did in 2004. Back then, Microsoft paid out $3 per share, or $32 billion, to investors in its stock on a one-time basis.
When looking for dividend stocks, look for a trend of steady dividends (or, better yet, dividend growth) over time. Dividend cutting is looked upon very negatively by the markets, so be wary of any stocks that have cut their dividends in the past. Similarly, keep an eye out for any dividend yields that 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 by full percentage points at a time. That's because they already have such a large base of business operations. Walmart, for example, is unlikely to see double-digit gains in sales since its revenue is already in the hundreds of billions. Smaller companies and newer companies are riskier for investors, but some offer tantalizing opportunities for growth.
Growth stocks can come out of any industry, but high-tech companies in Silicon Valley have shown great growth prospects throughout the 21st century. These stocks can be companies of any size. Larger growth stocks are typically more stable and less risky, but they provide lower returns than the smaller, newer businesses that still have lots of room to grow.
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 geographic locations. But 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. If you have any concerns or reservations, hold off on clicking the buy button and wait for a safer investment to come along.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.