If you’ve never invested in the stock market, it may seem like an overly complex, hard-to-grasp machine that only true financial experts can navigate successfully. That’s partly true…it is an intricate business, with several mechanisms and factors that contribute to its success.
At the same time, even the most successful investors of all time started with nothing. They had to make an entry into the stock market at some point — and when they did, they were nowhere close to the financial wizards they ultimately became.
So take heart. As someone interested in investing in the stock market for the first time, you’re at the same place that Warren Buffett was at one point. You also face the same question he did: What’s the best stock to buy for beginners to get started in their investment adventures?
Steps to Take Before Investing
While the stock market offers several opportunities for solid, even fairly quick growth of net worth, a true beginner needs to be sufficiently prepared before choosing what stocks to buy. Crucial steps in that preparation include dissolving your most pressing debt liabilities and creating a financial safety net.
Experts agree that the most important first step is to pay down high-interest debts. These are generally defined as debts that carry double-digit interest rates or have rates that exceed those of long-term repayment debts, like student loans and house mortgages (usually between 2% and 6%). Credit cards and personal loans are the most common sources of high-interest debt.
It’s also a good idea to build an emergency fund — a nest egg for unforeseen accidents or events (like medical crises, accidents, home repairs) that might saddle you with immediate financial responsibilities. Keeping three to six months’ worth of regular expenses in an interest bearing, federally insured savings account should be sufficient for this purpose.
Opening a Brokerage Account
Investing in the stock market has never been easier than it is now. Private individuals who aren’t professional money managers or stock traders have an incredible range of online financial services to choose from. Investment brokerages have made it much easier to open accounts, and most have done away with per-transaction fees, commission charges, and account balance minimums that used to make trading less appealing.
TD Ameritrade, Fidelity, E*TRADE, Robinhood, Merrill, and Charles Schwab are just a few of your options for an online brokerage account. As of 2021, each of these services let you open an account with no minimum balance (although you’ll have to put funds in when you want to start buying shares). They’ve also eliminated fees for transactions, so you won’t be hit with hidden costs whenever you trade.
Your First Investment Strategies
Every investor takes a different approach to the stock market. Beginning investors with no preconceived ideas of how stock trading works can face a dizzying array of strategies and advice. It’s not easy to pick through all this information to find a game plan that’s going to work right out of the gate.
Chances are that your investment strategy will most likely change as you gain investment experience. Your broader goals — saving for retirement, funding a major future expense, and so forth — may not change all that much, but some smaller parts of your investment strategy will transform along the way. That’s reflective of the nature of the stock market: It has maintained an overall constant growth for over 200 years, but it’s also had to adapt in certain ways to keep that growth going…you’ll have to do the same.
You don’t need a point-by-point strategy to jump into the stock market. But thinking about your overall goals is always a great idea before you buy your first stock. Some aspects to consider when looking for the best stock to buy for beginners:
Your Long-Term Goals
Many investors perceive investments as ways to set themselves up for a comfortable retirement. Other investors are looking to fund a future, large-scale purchase like a home or vehicle. Still others just want to generate an additional income source. Think about how you plan to use potential stock profits in the next five years and beyond.
Your Risk Tolerance
There are no guarantees with the stock market. No matter how solid a portfolio you have or how reliable your most successful stocks may be, there’s always an element of risk with every investment. Some traders are fine with living a little dangerously — they seek high-risk opportunities with the potential for quick profits. Others are more prudent and prefer investing in blue-chip stocks with historically decent growth. Think seriously about what level of risk you can live with.
Value Investing
Risk tolerance has a lot to do with what kind of stocks you’ll pursue. Some securities are considered value stocks, which are shares from historically dependable companies that are, for whatever reason, discounted at the moment. Shares in these companies may be great investments if the buyer believes the company’s foundation is solid and stock prices will rebound.
Growth Investing
Growth stocks are investments typically associated with up-and-coming companies that stand to make impressive future gains. Growth investors believe that the businesses they invest in offer a service or product that will be in demand and that their returns for investing will be substantial.
Growth stocks are riskier than value stocks, but if you pick the right one, you could see sizable gains. Amazon was a growth stock in the 1990s when it was an unproven but promising company; now, you could argue it’s a solid value stock.
There are plenty of other factors that go along with forming an investment strategy, including the need to stay on top of current financial events and research. But given this information, what strategy should total newcomers to the stock market adopt first?
Where to Start
All stock market investors had to start somewhere. Some investors gain experience more quickly than others and make riskier moves earlier. Some prefer to make passive investments over prolonged periods of time. But at some point, they all have to make their first purchase. What kind of commodity is the best stock to buy for beginners?
We believe the most important element when buying your first stock is finding one that will help you to get oriented to the investor’s mindset. For this purpose, true beginners will want to buy shares in a company with dependable returns. They should choose one that a beginning investor can monitor and track themselves without too much effort.
So generally, we’re talking about low-risk stocks from blue-chip companies — long-lasting, established industry leaders that have weathered the ups and downs of the stock market for generations. Most of them are household names.
Things to look for in your first stock include:
Size
Gigantic companies have shown that they have what it takes to be successful, especially if they’ve been around for decades (or even centuries). They’re industry titans with solid leadership that has kept them solvent during economic downturns. Barring an utter, complete, earth-shattering disaster, companies like Wal-Mart, Apple, Microsoft, Procter & Gamble, Johnson & Johnson, Amazon, and the like aren’t going to belly flop anytime soon, if ever. They’re safe investments to start with.
Profitability
Logically, a company that generates consistent profits over the long term is a good, safe bet. They’ve made enough money to grow, innovate, and withstand recessions and other economic downturns. Every publicly traded company is required to report its annual profits. That information is easily accessible to anyone with a working Internet connection.
Look for a company that shows solid rates of return over the long haul — one with steady gains throughout, say, five years should be considered to be a strong contender for the best stock to buy for beginners.
Dividends
Many (but not all) blue-chip companies reward their stockholders with occasional payments from their earnings. Coca-Cola, IBM, and 3M are examples of companies that pay dividends to their shareholders on a quarterly or annual basis. While it shouldn’t be a deal-breaker if a company doesn’t use the dividend model, if they do, it’s a good sign that they’re a consistently profitable blue-chip company, one of the good stocks for beginners.
Diversified Business
Large companies with a broad range of services tend to be more resilient over the years. Amazon, for example, is no longer just an online bookseller; it sells pretty much anything. Microsoft offers both consumer and business software, along with cloud and enterprise solutions. Not all companies worth a first investment have a presence throughout multiple business sectors, but those that do are certainly worth looking into first.
What You Want to Avoid — For Now
Every single stock on the market has the potential to break out. If they’ve grown enough to get a listing on the New York Stock Exchange or Nasdaq, obviously, they’ve done something right. But they’re not necessarily the best companies to buy into right at the start of your investment adventure.
Many of them are penny stocks, which are typically available for less than $5 a share. Penny stocks are usually given from emerging companies just gaining a foothold in their industry or from businesses that have experienced a huge decline in value for some reason. While a select few of them may eventually break out and deliver massive profits, many of them will flame out. Despite their attractive price points, penny stocks are usually too volatile to be good stocks for beginners.
Also, be watchful for cyclical stocks. These are attached to companies that are largely dependent on overall market conditions and events to ensure success and that suffer the most from industry-wide downturns. For example, restaurants experienced a huge decline during the COVID-19 pandemic. Agricultural companies may face problems during long droughts or adverse weather. Hotels and airlines are less successful when tourism is down, which tends to be the case during economic recessions.
Down the road, after you’ve obtained some experience and honed your research skills, you may choose to strategically invest in penny and cyclical stocks to realize some immediate gains. But at the very beginning of your investment career, such a commodity isn’t necessarily the best stock to buy for beginners. Pick a more dependable stock to serve as a foundation.
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