So you’re interested in investing, but you have no idea how to start and which stock to buy? You’ve come to the right place!
Investing in financial instruments seems difficult, but it’s actually very easy. I’m for long-term investing which means that you do your homework once, buy stocks you like based on criteria you’ll learn about in this article, and then just sit back and relax. You can check the current market price of your stocks from time to time, but it’s not a good idea to get crazy about it. Your stocks will definitely lose some value and then gain it back and some more over time, so there’s no reason to follow the markets each day.
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You should be comfortable with holding your stocks for years. You should act as the owner of the business, which you’ll actually become by buying shares of companies.
So what are the characteristics of stocks that are good for beginners and what practices you should definitely avoid? Let’s find out!
1. Wide Moat
Castle moat makes it difficult for enemies to invade. The wider it is, the more enemies will end up in it. In an economic sense, a wide moat makes it harder for the competition to enter the market and steal your company’s market share.
In other words, your stock should have a sustainable competitive advantage which comes in many forms. Here are some of the typical categories of competitive advantages.
The best stocks for beginners are leaders in their businesses. It’s not a good idea for beginners to put their money into startups. They can have appealing ideas but they didn’t prove them viable and the stock prices will probably be very volatile, which means that they can fluctuate immensely over time.
As more people use the company’s services and products, these become more valuable as a result. Remember all those discussion platforms existing before Facebook took the stage? Where are they now? How about all the new wannabe competitors that emerge every year? The simple fact that everyone is on Facebook makes it too big to fail and as more and more people join Facebook and can be reached only through its Messenger service, it becomes very difficult and challenging not to use this platform.
Don’t buy a shiny new thing, focus on companies that have been around for years or even decades, and have consistent revenue and profit growth. Such companies are usually owned by institutional investors like mutual funds as well.
While not necessarily a deal-breaker, if a stock has an established track record of dividend growth, it’s definitely a good characteristic for long-term investment.
Ever heard about Apple and iPhone? That’s what I’m talking about. These days, there are basically two types of mobile phones. iPhones and everything else running Android. Even though you can still read reviews comparing iPhones with this and that, the only real difference between iPhone and everything else is the experience which comes not with the quality of camera or color, but with the ease of use and snappiness of operating system which you can’t get on any other phone. Apple built a great system of services around its hardware effectively locking down users inside its walled garden with Macs, iPads, iPhones, AirPods, and Apple Watches.
Whatever you think about Apple, when it comes to the quality of its business, it’s hard to find a company with a comparable approach and results.
2. Basic Metrics
Once you pick the company with a wide moat, you should consider whether the current market price is fair or whether the company is oversold (the price is too low) or overbought (the price is too high). Remember that nobody knows what will be the future development of the company, but how the market considers a particular stock price works as a self-fulfilling prophecy. If enough market players consider the stock to be overbought, the price will eventually go down regardless of the quality of the business and vice-versa.
When you’re in for the long-term investment, as I strongly recommend, the current price shouldn’t be the sole reason for not buying the stock you like, but it might give you some perspective nevertheless.
P/E stands for price-to-earnings and this metric allows you to compare similar businesses. Take the current market price of the stock and divide it by the sum of earnings of the last 12 months. A higher P/E ratio demonstrates the willingness of investors to pay a higher price for the stocks today because they expect their growth in the future.
Historically, the average P/E ratio for the S&P 500 index has ranged from 13 to 15 which means that a company with the P/E of 15 trades at 15 times earnings.
There are companies with a much higher P/E ratio, like for example Amazon which currently trades around 113 times earning. Another example is Apple which trades around 24 times earnings.
The payout ratio is the annual dividend rate expressed as a percentage of the company’s earnings. This is an important metric for investors focusing on dividends as it can tell you whether the current dividend is sustainable or not.
3. Stocks to Avoid at the Beginning
As I already mentioned, beginners should focus on well-established companies with a wide moat and loyal customers. They should definitely avoid the wrong type of stocks that can make their portfolios very volatile.
Here are some types of stocks you should avoid when you’re just starting.
The obscure businesses you don’t understand
They say that the best business is the one that you can describe in one sentence and is boring as hell. Take a look at Coca-cola for example. Health consequences of drinking sugary water aside, its business is dead-simple and it’s one of the most stable and financially healthy companies you can buy. Don’t buy companies you don’t understand, if their business is unclear, there’s probably a reason to avoid it.
It’s a well-known truth that IPOs or initial public offerings are interesting for the insiders, not for the public. Avoid these “opportunities” at all costs and focus on well-established stocks traded for decades instead.
These are highly risky stocks that didn’t make it to major stock exchanges. They have a very low capitalization, usually, much less than $100 million and their share prices are below $5 or even less, in pennies. They should be avoided by all investors, let alone beginners.
4. Stocks to Buy
Now that you know what to look for and what to avoid, let’s take a look at some great stocks for beginners to consider.
Apple (AAPL) - it’s probably useless to introduce this technology monster company. Apple has been my darling for many years and I can’t see the reason why to sell any of my shares. The business is profitable, the company enjoys a wide moat, its services recently started to grow very rapidly. The company pays dividends. The P/E ratio is acceptable. I believe that Apple is a well-established business that should be a part of every beginner’s portfolio.
Amazon (AMZN) - it’s a well-known online shop for everything, that makes up nearly half of all U.S. e-commerce sales, but Amazon has something far more profitable most people are not aware of. AWS or Amazon Web Services is one of the best cloud infrastructure providers. The only comparable competitors are Microsoft Azure and Google Cloud Computing. Amazon has several of the competitive advantages and it’s a great beginner-friendly stock.
Google (GOOG) - it would be surprising if you haven’t heard of Google, but you might not be aware of the fact, that it’s actually a subsidiary of Alphabet company. If you want to buy the shares of Google, you need to buy the shares of Alphabet even though the ticket (stock shortcut) is still GOOG. Confusing? Yes. Anyway, Google is a dominant leader in internet search and you should definitely consider adding some shares of this technology leader to your portfolio.
Berkshire Hathaway (BRK-B) - this conglomerate with more than 60 businesses has a huge portfolio mostly hand-selected by Warren Buffet, the most successful investor of all time. Berkshire is focused on companies with big competitive advantages and if you want to own a part of Buffet’s wisdom, add some shares to your basket.
5. How to Get Started
Now that you know what stocks you should buy, it’s time to open and fund a brokerage account and buy your first shares. Always remember that you need to keep it cool with a long-term approach. This means that when the stocks go down (and they definitely will), it can be very tempting to panic and sell. Don’t. You will only end up buying them back later for a much higher price.
If you don’t have your brokerage account yet, I recommend Firstrade. I’ve been with them for many years now and they deliver top-notch services for a very good price. As a long-term investor, you don’t need to worry that much about commissions, but it’s good to know that Firstrade won’t charge you anything as long as you stay within some reasonable trading pattern.
It’s also worth mentioning that Firstrade is one of the very few American brokers that will allow you to open account even if you’re not the US citizen.