Getting started is the hardest part of any endeavor. Investing is no different.
While the world of investing can be infinitely complex, there are a few ways for investors to start investing in the stock market (also known as the equity market or even share market).
Most beginner investors will either gravitate towards buying an index fund, an exchange-traded fund (ETF) or mutual fund that tracks an entire stock exchange, or they’ll start buying penny stocks in the hope of large and quick profits that are the envy of Wall Street. But it’s really a combination of these investments that make stock market investing powerful over time.
Done right, a new investor can select individual stocks that benefit from long-term trends to take advantage of the wealth-creation power that stocks have to offer.
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Why Should You Invest in Stocks?
Simply put, there’s no better way to build long-term wealth and let your money earn money for you. That’s the power of investment.
This is due to the power of stock returns over time. Historically, the stock market returns 7 percent per year after inflation (if any).
Other assets don’t perform nearly as well. In the time it takes the value of your home to double, stocks may have doubled two or three times! And investing in bonds or just keeping cash in the bank is a recipe to lose money over time.
Of course, the stock market can and will have large selloffs from time to time. That’s why a good investment strategy is to own a few of these other assets for the steadiness and consistency they provide over time.
The real advantage to investing in stocks comes from the ability to buy and hold great companies for a number of years. As long as you don’t sell out your winners, you won’t have to pay capital gains taxes. And don’t worry, there will be plenty of ways to find short-term opportunities for trading stocks along the way.
Formulating a Basic Strategy
As with any long-term endeavor, a plan is a good place to start. The most successful traders and investors alike find and hone in on a plan that works for them, and then they stick with it. That’s a simple recipe for investing success.
For a beginning investor, one such strategy might be a 50-40-10 plan.
Under such a plan, 50 percent of their wealth would be passively invested in a long-term fund designed to profit along with the overall market. 40 percent of the portfolio would go towards high-quality dividend-paying blue-chip stocks with robust free cash flow. The final 10 percent could go to companies that are high-risk, but potentially high-rewarding, like day trading penny stocks or undervalued stocks with a favorable technical analysis or stock chart right now that look poised to move.
Under this strategy, there’s sufficient diversification that any one stock going bankrupt won’t hurt the overall portfolio too much, but you still have some capital to make some great stock picks. Investors are aligned for the long-term, but still have room for mid- and short-term plays with the active half of their portfolio.
As you get more comfortable, and start adding in things like options trades, your plan can be adjusted to ensure you maximize your returns while you minimize your risks. That follows an investment term known as your personal risk tolerance.
Five Best Stocks to Invest in for Beginners:
Best Stock #1: Salesforce (CRM)
One of the best-performing tech stocks of recent years, it’s no surprise that Salesforce (CRM) has its own artificial intelligence division as well, making it a solid AI company to boot. Known as Salesforce AI, it integrates with their software-as-a-service (SaaS) suite of products.
Salesforce is a great cloud play, and adding artificial intelligence on top of that could be huge for the already-massive company. Artificial intelligence could allow the company to better serve its customers, perform predictive analytics, and better help out the companies that rely on Salesforce to get its job done.
Specific examples could be in finding ways to improve workflow, determine the effectiveness of team members, and analyze data in ways that may not have been traditionally thought of.
Compared to some of the other big-name companies in the artificial intelligence space, Salesforce hasn’t been as strong a performer. However, shares have moved sharply up, as the company received news that it was joining the 30-member Dow Jones Industrial Average, or Dow. That’s the most-widely-watched stock market index of all time, and one likely to lead the company to higher returns in the future.
In terms of profits, the company’s overall profit picture has been muted in the short-term. That makes this an optimal company to buy now, as it’s been underperforming other peers in the tech and AI space lately, but will recover in time. Now’s the time to buy a great and growing company near its intrinsic value.
Best Stock #2: ViacomCBS (VIAC)
The media is increasingly concentrated into a number of big-name companies.
In 2019, Viacom and CBS merged into their current form. The company has local media programming, a publishing division, and cable networks as well as an entertainment and a sports division.
This offers a variety of entertainment content, which can often be a high-margin product. The company’s foray into streaming is showing signs of solid growth.
Right now, the company is going through its post-merger blues. Shares were heavily hit in the March selloff, and even with a partial recovery, they’re down by half over the past year.
Even while that was happening, however, the company did report strong earnings beat in that quarter. The company also announced that it was redeeming some of its debt ahead of schedule, which will help clean up its balance sheet.
Meanwhile, the company has one of the highest yielding dividend stocks in the media space, and an attractive valuation as it’s still being digested by the market.
As the new entity has a limited dividend history, we don’t yet know how it will change. But chances are the company will attract investors if it is able to steadily grow its dividend payout over time.
Best Stock #3: Microsoft (MSFT)
While Microsoft is best known for the Windows operating system, its growing web-services division, its Xbox video game system and even assets like the social media networking site LinkedIn, it also has an artificial intelligence division. It’s called Microsoft AI.
The lackluster name hides a large platform that provides tools and services for creating AI-run products. It also includes the infrastructure needed to integrate new AI developments with existing ones. Its best-known product in the space is the Azure Machine Learning service.
While not a huge part of the Microsoft brand as a whole, it’s still a big business in its own right. In 2019, the company made a $1 billion investment in OpenAI to increase its capabilities.
When Microsoft enters into a space, it competes to be one of the top dogs, a quality that makes it an exceptional investment. Its artificial intelligence investments show that it will continue to forge ahead in this space, providing the software and cloud services needed to take AI technologies to the next level.
The company has also become a solid dividend play as well, with regular dividend hikes over the years.
In short, this company has changed substantially from the days when it was just known for operating systems, and the company will likely continue to quietly and surprisingly innovate in a number of spaces. Its recent work to acquire Chinese social media company Tik Tok also shows that the company is working to become a leader in social media behind Facebook (FB) as well.
Best Stock #4: Realty Income (O)
Realty Income (O) is a real estate investment trust (REIT). REITs are a bit different from common stocks in that they have to pay out 90 percent of their earnings to shareholders. By doing so, the company can avoid taxation at the corporate level. That’s similar to a preferred shareholder, although preferred shares have a par value for their shares that tends to cap the price.
Realty Income owns a number of commercial and retail properties and operates under triple-net leases. This means the tenants pay a lower rent, but they’re also responsible for things like utilities and insurance. That means Realty Income is pretty close to a purely pass-through real estate play.
That allows the company to stay operationally lean, while also providing for sizeable dividend payouts as well. Shares currently pay out $2.80 annually, making for a 4.5 percent dividend yield right now.
While that isn’t a huge yield in the REIT space—some can be higher than 10 percent—the company is a dividend aristocrat that has managed to up its payout every year.
And, while most dividends are paid out quarterly, Realty Income pays out its dividend monthly. That makes it an optimal play for investors seeking current income without the unevenness of a payment every 90 days. All in all, it’s a great company for getting started investing in the real estate space, with the power of the investment returns of the stock market.
Best Stock #5: McDonald’s (MCD)
Although the restaurant industry has been hard hit in 2020, fast food companies have seen traffic hold up relatively well thanks to drive-thru operations. One of the biggest players has also been a great dividend growth play.
McDonald’s (MCD), with its golden arches, hardly needs an introduction. The company has over 38,600 locations, largely owned by franchisees. The franchise model allows the company to be large, while spreading the risk of ownership down to local owners.
That’s a great business model, as it means income largely passes through to the corporate level.
Right now, shares are paying out $5 per year. That’s up from $4.82 in the past year. Overall, the company has done a great job of growing out its dividend payments.
Although the current dividend yield of 2.6 percent doesn’t look terribly large, the dividend growth behind the company and market price appreciation still makes this a great play.
Whether the economy is expanding or contracting, McDonald’s is a steady player, making it a top dividend play for today’s uncertain environment.
How Many Stocks Should a Beginner Buy?
If you’re just starting on your investment journey, don’t put all your eggs in one basket (unless it’s a diversified fund, like an index fund or ETF)! That’s true whether you’re a beginner trader or a beginner investor.
If you’re buying individual stocks, from penny stocks to companies with trillion-dollar market caps, it’s a good idea to spread your starting capital around four or five different companies and then add to that as your finances permit. That way you can still have some long-term holdings, while also going out with the day traders in the quest for daily profits.
Studies have shown that once an investor gets to over 20 positions, they’re more than sufficiently diversified, so make sure you don’t spread yourself too thin when stock investing.
And if you’re already putting a big percentage of your investable assets into a passive index fund, you’re ready to start getting into the lucrative world of individual stocks. Once you’re an experienced investor, you can add in things like options, preferred shares, and other assets to change your portfolio as you see fit.
How do I Start Investing With Little Money?
You’ll need to open a brokerage account and fund it. You can still find traditional stockbrokers, who will handle your transactions for a commission. And discount brokers also exist, who can handle a transaction for a lower commission, if you don’t want to use your computer or a phone app.
However, most of today’s online brokerage accounts and stock trading apps are becoming similar in terms of what stocks they offer and the commissions they offer are near zero. The catch? You have to enter everything yourself, and don’t get access to research or the like.
Once you’ve set up a brokerage account, you’ll be free to start buying and selling stocks. While it can feel a little overwhelming at first, as long as you’ve set an allocation plan for your investments, you can ensure that you’re in the market for the long term while also targeting specific stocks that are attractive to you.
Today’s investors can also buy fractional shares as well, so there’s no reason not to use your trading account to buy shares of a company you think will do well for the long haul, even if you don’t have that much to invest in.