Starting in the stock investing world may seem like an undertaking that is quite daunting for individuals unfamiliar with this sector.
However, today, venturing into this sphere is simpler than ever, primarily thanks to the availability of online brokerage platforms and the various assistant tools that make this venture super easy.
In recent years, the number of online commission-free trading services with simplified user interfaces has grown exponentially, opening up this activity for people from all walks of life.
Naturally, this practice carries various hazards, and anyone getting into it should understand the ones in play and how they can affect their invested funds.
Thus, it is vital for everyone to grasp chief trading concepts like risk management and diversification before they start.
Thankfully now, the accessibility of self-education resources is vast, allowing anyone to read books on this topic, consult financial advisors, and attend seminars from the comfort of their home.
Moreover, affordable share market tracker software features dozens of trading analysis apparatuses that make investing operations run as smoothly as possible for traders of all experience levels.
In the subheadings below, we shall cover five stock types beginners should consider investing in.
These are ones aligned with most newcomers to this sphere’s investment goals and risk tolerance profile.
Without question, the ultimate aim of most newbies should be to make informed decisions during the stock selection process and avoid common pitfalls that can produce financial losses.
Hence, that is what this article hopes to help with.
Most industry veterans will be swift to advise beginner investors to pour their hard-earned cash into blue-chip stocks.
What is a blue-chip stock? It is a security with a national reputation for reliability, quality, and the ability to operate profitably in various economic circumstances.
The origin of this term stems from poker, where blue-colored chips often assume the role of the most valued ones on the table.
And this phrase, in an investment context, was initially coined by a Dow Jones employee, Oliver Gingold, who observed that specific stocks trading at more than $200 per share showed tremendous reliability.
Some notable examples of blue-chip stocks include ones from the Coca-Cola Company, Visa Inc, JPMorgan Chase & Co, Johnson & Johnson, Microsoft Corporation, Apple, Pfizer, and Walmart.
All the listed entities have been in business for decades and have shown superb resistance to market volatility.
They are considered low-risk investments, as they are in little danger of experiencing dramatic price dips due to the level of establishment these companies enjoy. Plus, the faith people have in these brands.
Therefore, stability and the proven track record of weathering economic downturns is the primary advantage in the eyes of many.
They also boast potential for growth over time since their management teams can afford to innovate and adapt to evolving market conditions.
On top of all these aspects, many blue-chip companies are also attractive to investors on account of their ability to pay consistent dividends, supplying passive income streams to investors.
As their name suggests, growth stocks are shares in entities that experts expect to grow faster than their sector peers, mainly because of their capability to generate above-average revenues.
These are usually companies that like to reinvest their profits into expanding their operations by acquiring other businesses or developing novel services and products rather than giving their shareholders dividend payouts, like in the case of blue-chip stocks.
Expanding corporate entities whose shares have notched respectable price spikes in the past decade include Shopify, Zoom Video Communications, Square, Inc, NVIDIA, and Tesla.
It is worth noting that buying and holding assets like these is sizably more dangerous than blue-chip stocks because their prices can be far more volatile because they have not yet established the level of financial stability that blue-chip stocks have.
Thus, it is vital for investors to conduct their due diligence before investing in these securities.
Their upsides lie in their potential for high returns, their positions in emerging industries that can play a crucial role in the global market in the coming years, and their position in diversifying one’s portfolios.
We already somewhat covered dividend-paying stocks above. But it is pivotal to mark that not all blue-chip stocks pay dividends.
For readers not entirely familiar with the concept of dividends, these are corporate actions that create reliable periodical payouts for shareholders.
Essentially, a corporate action is a decision that a company’s board of directors agrees on, which may or may not require the nod of approval of shareholders.
Dividends are a type of action that involves payments made to individuals that own shares in a business that is doing well, meaning it is turning a profit.
Instead of reinvesting its accumulated capital, this organization has picked to reward its equity owners with a portion of its attained funds for a specified timeframe.
Of course, the possibility of tapping into a stable source of passive income is something that many investors find extremely enticing.
Also, many business entities with clearly defined dividend policies boast long-term growth potential, leading to long-haul capital appreciation. They usually are too less susceptible to market volatility.
Some famous dividend-paying corporations that have proven most lucrative for shareholders are AT&T Inc, Mcdonald’s Corporation, Exxon Mobil Corporation, Home Depot, Inc, and IBM.
Now, an index fund is something that most investment newcomers are likely not to know about. It is an exchange-traded or mutual fund that seeks to track a particular market index.
The latter is a performance measure of a specific group of securities representing a distinct sector section or a market as a whole.
Examples are the NASDAQ Composite which tracks over three thousand stocks listed on the NASDAQ exchange, then the Dow Jones Industrial Average, which monitors the thirty most large-cap US stocks, and the S&P 500, an index that assesses the health of the five hundred largest cap companies in the United States.
So, in short, index funds attempt to track a given market/sector index. That means they create a diversified stack of securities that mimic the composition of their chosen index counterpart.
The pros of this are that this practice supplies immediate diversification, quickly reducing the overall risk investment portfolios carry.
Furthermore, index funds typically have lower fees, credited to the fact they are a form of passive investing, requiring less time and effort spent on managing them than actively-managed securities like hedge funds.
Given that they get seen as low-cost and low-maintenance that bring acceptable rewards with acceptable levels of risk, many novice investors choose them.
Some of the more talked about index funds in trading circles now are the Vanguard Total Stock Market Index Fund, the Fidelity NASDAQ Composite Index Fund, and the Vanguard 500 Index Fund.
Exchange-Traded Funds (ETFs)
We touched on ETFs (exchange-traded funds) in the subheading above this one.
These are funds holding a basket of bonds and stocks, which trade as a single stock on an exchange designed to track a specific market index, supplying traders with exposure to diversification via one investment.
State Street Global Advisors, in 1993, introduced the first exchange-traded fund.
From that point, ETFs have only grown in demand, with many different categories available to investors, opening the doors for a wide range of trading strategies.
Aside from diversity, ETFs are also alluring because they have lower expense ratios than actively managed funds, can get easily bought and sold, and are, as a rule of thumb, way more tax-efficient than most mutual funds, principally because their capital gains distributions are lower.
Additionally, they offer high-end flexibility, permitting investors to adjust their portfolios quickly when unpredictable occurrences strike.
ETFs that seem to enjoy a sizable degree of popularity at writing are Invesco QQQ Trust, the Vanguard FTSE Emerging Markets ETF, the iShares Core US Aggregate Bond ETF, and the iShares Core US Aggregate Bond ETF.
The Wrap Up
Without question, investing in stocks is a more than apt way for anyone to grow their wealth en route to hitting their long-term financial goals.
While many may fear that trading securities is risky, it does not have to be if one sticks to tried-and-tested approaches and is aware of things like risk tolerance and investment time horizons.
For most beginners, the best way to start is seeking to diversify their portfolio with low-cost, passive index funds or ETFs from the get-go.
That is so because these give broad exposure to a range of bonds and stocks while minimizing the risk of loss of funds and maximizing long-term returns.
Safe and wise stock investing will virtually always create better returns than keeping money in a savings account over a number of years.
Though properly assessing one’s and the market’s circumstances are essential. They are equally paramount to incorporating a suitable strategy to mitigate various practice hazards.
Personality traits that can also exponentially contribute to one’s success in a trading career are patience and discipline.
Especially important is not allowing emotions to affect investment decisions, causing one to overreact to market fluctuations and make moves that defy cool-headed logic.