If you’re unsure about which stocks to choose, but you’re ready to begin investing in the stock market, then this is the correct place for you. Certain attributes of stocks are ideal for beginners, and there are also certain practices that beginners should avoid when selecting their initial companies for their portfolios.
Let’s break down the key points for beginner investors when selecting their first stocks and understanding what to avoid. Moreover, we will provide a few examples of beginner-friendly stocks to get you started on your search.
1. Define your investing goals
To begin, consider the reason behind your decision to invest in the stock market. Are you aiming to generate wealth for your retirement, secure funds for your children’s education, or accumulate some savings for unexpected circumstances?
It is generally advised that you refrain from investing in stocks if you anticipate needing the money within the next three to five years. It is even more beneficial to have longer time horizons. The stock market tends to experience significant fluctuations in shorter durations. Therefore, it is crucial to comprehend your risk tolerance and be mentally prepared to endure the highs and lows before investing.
2. Set yourself up for success
Step by step, start by opening a brokerage account before you begin investing in stocks. To find the best option for you, compare the features offered by some of the top online brokers.
Certain platforms provide valuable resources for individuals who are new to trading, including educational materials, the ability to conduct investment research, and additional features. It is important to note that although basic online stock trading is typically free on major brokerage websites, there may be various fees that users should familiarize themselves with, and certain platforms may have a minimum investment requirement.
3. Look for a wide moat when investing
When it comes to discussing Warren Buffett’s investment approach, experienced investors often mention the idea of a “wide moat.” This term is used to illustrate that, similar to a castle protected by a wide moat, a company with a sustainable competitive advantage can deter rivals from capturing its market share. A reliable beginner investment would possess this sort of protective moat.
Identifying such an advantage is not overly challenging once you are aware of what to search for, given that it can manifest in various ways. Generally, most sustainable competitive advantages can be classified into these categories.
Network effects refer to a phenomenon where the value and desirability of a product or service increase as more individuals utilize it. For instance, Meta Platforms (Facebook) exemplifies this concept. As the number of Facebook users grows, it becomes increasingly challenging for individuals to abstain from incorporating the platform into their daily routines.
There are different types of cost advantages that a business can have. For instance, having an efficient distribution network can result in lower costs for a company’s product transportation across the country. A company with a well-established brand name can command higher prices compared to its competitors. Additionally, a proprietary manufacturing process can lead to lower production costs.
One example of an intangible asset that can provide protection against competitors is patents, in addition to a brand name. For instance, BlackBerry (BB -0.62%) still holds value primarily due to its extensive portfolio of over 44,000 patents, despite its decreased phone sales.
Sector leadership: The majority of the top beginner stocks are either at the forefront of their industries or in extremely close proximity to it.
4. Understand basic metrics
The ability to recognize great businesses holds more significance than the ability to recognize cheap stocks. Generally, great businesses tend to perform well in the long run, even if they have higher valuations. In contrast, investing in a bad business at a low valuation rarely leads to positive outcomes.
After acquiring the knowledge of finding good businesses, you can utilize certain fundamental stock investment metrics to restrict your options.
The price-to-earnings ratio, also known as the P/E ratio, is a widely used metric for valuation. To calculate it, divide the current share price of a company by its earnings for the past 12 months. Alternatively, you can use the projected earnings for the next 12 months to calculate the forward P/E ratio.
The PEG ratio serves to equalize the P/E ratio by dividing the company’s P/E by its projected earnings growth rate. For instance, a company with a P/E of 30 and an anticipated growth rate of 15% would have a PEG ratio of 2.0.
The payout ratio is a way to evaluate dividend stability by expressing the annual dividend rate as a percentage of earnings. For instance, if a company earned $2 and paid out $1 per share in dividends last year, its payout ratio would be 50%.
You can learn many other investing metrics, some of which can help you find value stocks and some of which can help you evaluate fast-growing companies or growth stocks.
5. Know which stocks to avoid
As a beginning investor, it is vital to be aware of what you should steer clear of. Making the mistake of investing in the wrong kind of stock can result in a fluctuating portfolio value reminiscent of a roller coaster ride, and at worst, lead to a complete loss of your invested funds.
Given the aforementioned, it would be prudent to avoid the following things initially.
The statement holds particularly true for companies that are growing at a fast pace and have not yet generated any profits. Engaging in growth investing can be an effective approach to accumulate wealth, although it involves a certain level of unpredictability. Therefore, it is advisable to hold off on investing in the next promising opportunity until you have established a solid foundation for your investment portfolio and have a better comprehension of stocks.
Penny stocks, which can be loosely defined as stocks with a market value below $200 million, share prices below $5, or those that do not trade on major exchanges, should be avoided by all investors, not only beginners.
IPOs, short for initial public offerings, are the means through which companies enter the public trading sphere. It is important for novice investors to bear in mind that investing in newly listed companies can be highly unpredictable and is generally not recommended as an advisable approach to stock purchase.
If you’re unsure about a business, here’s a helpful tip that applies to both novice and experienced investors. If you can’t succinctly describe a company’s operations and revenue generation in a few sentences, it’s best to avoid investing in it. With numerous publicly traded companies available, it should be possible to discover numerous opportunities in straightforward industries.
6. Invest as much or as little as you want
In the past, there was a common belief that investing was only for men dressed in grey suits. However, this perception has changed over time, and now anyone can participate in investing. This opportunity is made possible by online investment platforms such as Wealthify, which allow individuals to invest any amount they desire, ranging from £1 to £100,000.
If you are wondering, it is indeed possible to accumulate a substantial savings by starting with a small amount of money, as long as you consistently contribute to your investment plan and remain committed to it over a significant period of time. For example, by investing £30 every month for 25 years, you could potentially amass approximately £14,488, which is certainly a noteworthy amount.
7. Think about what you want to invest in
If you have just begun investing, you will soon realize that there are various investment options to consider for building your portfolio. It is crucial to contemplate which investment types you would like to include in your portfolio.
The answer will primarily rely on your risk tolerance. If you are careful and prioritize reducing potential losses, then safer investments like government and corporate bonds might be suitable for you because they generally experience minimal value fluctuations.
Alternatively, if you feel at ease with the volatility of the market and enjoy assuming risks, you might contemplate venturing into higher risk investments, such as shares. In contrast, if you find yourself in a moderate position, you have the option to include both bonds and shares in your portfolio as it ultimately depends on your preference.
8. Consider diversifying your portfolio
No matter what your investment style is, it is advisable to reduce your risk. If you wish to minimize possible losses, you can achieve this by diversifying your portfolio, distributing your funds among various investment types and regions.
Consider this. Should you choose to invest all your money in just one or two companies, you could potentially face an unpleasant surprise if those companies encounter difficulties. However, if you opt to diversify your investments by purchasing a variety of assets (such as shares, bonds, and property) and investing in different financial markets, the probability of losing all your money will diminish.
9. Try to remain calm when markets fall
When it comes to financial markets, they can be compared to roller coasters in terms of their fluctuating nature. As an investor, it is crucial to acknowledge and be prepared for the likelihood of experiencing ups and downs. It is undeniable that witnessing market declines can be anxiety-inducing, but it is essential to stay composed in such situations. Selling your investments in response to these downturns will only materialize your losses.
By staying calm and avoiding the temptation to sell, any potential losses will only exist as a numerical figure on your dashboard. Therefore, if the markets rebound, there is a possibility that the value of your investments will increase, resulting in long-term gains.
If you attempt to time the market and exit when market conditions decline, you may still lose the opportunity to benefit from the favorable days and the subsequent recovery.
To illustrate this, let’s consider an example. If someone had invested £10,000 in the FTSE 100 at the beginning of 2000 and stayed invested until the end of 2019, they could have potentially accumulated around £21,255. This would indicate an average annual growth rate of 5.4% (including reinvested dividends). It is important to note that this period encompasses the Global Financial Crisis of 2008, which was one of the most severe market crashes ever recorded.
If, instead, you attempted to time the market and withdrew your funds on the bad days or prior to what you believed would be a downturn (when markets reached their lowest point), you would have not experienced some of the most profitable days. Consequently, your profits could have been significantly lower, and if you stayed out of the market for an extended period, your losses may have become tangible.
Due to their unpredictability, it is impossible to determine the optimal moment for investment in markets. In fact, the majority of investors who attempt to time the market for maximizing profits ultimately fail. Therefore, unless one possesses a crystal ball or secretive extraordinary abilities, it is advisable to concentrate on long-term objectives.
10. Think about the long-term
To be frank, most of us have a dislike for waiting. Patience is becoming increasingly scarce in a world where next-day delivery and on-demand TV are common. However, if you are committed to investing and aiming to maximize potential profits, it is crucial to cultivate patience and adopt a long-term perspective.
Many studies indicate that the probability of making a profit increases as the duration of investment increases. To illustrate, if one were to invest £10,000 in a Stocks and Shares ISA and maintain the investment for 15 years, the potential return could reach £16,333. Conversely, if an additional 10 years is patiently awaited, the potential return could rise to around £23,766, resulting in an additional £7,434.
