The average savings account pays a mere 0.06% interest, according to MarketWatch — starvation yields even in times of normal inflation. If you had put your money in the stock market instead of in the bank, on the other hand, you would have gained nearly 27% in 2021 with nothing more than an index fund that mirrors the S&P 500.
Twenty-seven percent gains, of course, are far better than the market’s historical average and there is no class of investment that comes with a guarantee. But the stock market is the greatest wealth-generation machine in history — and it’s more accessible to the everyman right now than it has been at any time on record.
If you’re thinking of making 2022 the year that you finally put your money to work by investing it in publicly traded companies, here’s what you need to know before you dive in.
Getting Started
Investing in stocks is important, but it’s also not a good idea until the rest of your financial house is in order. To score some long-term gains, you’ll need a sum of money — one that you’re confident you won’t need to tap into in the foreseeable future.
Pay Off High-Interest Debt
As good as returns from the stock market can be, they’re never going to top the interest rates of your credit cards over the long run. Before you consider investing, make sure you’ve paid down any and all high-interest debt. It’s just a better investment in the end.
Build an Emergency Fund
Anything from having a car break down to losing your job can leave you in unexpectedly dire financial straits. If your only remedy is to sell your stock investments, you might end up taking a loss right before the stock makes a big gain, depending on the timing of the stock markets and your emergency.
A general rule of thumb: You should have six months’ income stashed away in an emergency fund so that you can respond to short-term financial needs without having to sell off your stocks.
Choose a Stock Brokerage Account
You must have a brokerage account to buy and sell stocks. Brokerages used to be exclusive and expensive, but today, anyone can open an investment account online in a few minutes at no cost — literally. Unless you’re deliberately paying for a service like guided investing, there is no reason to pay any fees or commissions whatsoever to trade stocks — all you need is the money you plan to invest. From there, choose from the many competing no-cost brokers by their ease of use and extra features, like automatic investing, partial-share investing, and dividend reinvestment.
Investing can be very personal. Stock A may provide better returns over time, but if it’s also prone to wild swings, you’ll need to have patience and discipline so that you won’t be tempted to sell the stock prematurely. If Stock B offers lower returns but fewer spastic price gyrations, it could be a better selection for your portfolio.
In the end, the right stocks for one person aren’t necessarily the right ones for you. Take some time to learn more about yourself as an investor before settling on a specific batch of stocks.
What Makes a Stock Good for Beginners?
What beginners want from their stock investments is pretty much the same as what everyone else wants: the best returns possible for as long as possible. However, where beginners tend to differ from veteran market watchers is in their ability to ride out the ups and downs inherent to owning a stock. Investors will often refer to the “dumb money” that tends to overreact to market swings by either selling early or buying late. Meanwhile, major institutional owners know to wait out those hiccups to continue reaping the much larger, long-term rewards.
The sort of companies capable of posting huge gains are also ones capable of posting enormous losses. So, while you might eventually start branching out, beginners should likely avoid stocks with characteristics that can make them prone to big swings.
Small companies: Firms with a total market value of less than $2 billion are known as “small-cap stocks” or “micro-cap stocks.” In each case, these tend to be volatile companies in the early stages of growth. They could provide huge returns if you pick the right one, but many will fail or prove to be bad investments. Sticking to a market capitalization — i.e., the total value of all the company’s stock combined — of at least $10 billion is one way to avoid unstable companies. Clearly, there’s no guarantee (see Enron circa 2001), but it’s one rule that can prove invaluable to beginners.
Cyclical stocks: Certain industries can be notoriously fickle and are typically the first to take a plunge when the economy turns south. Things like consumer goods or cars seem like great stocks when times are good, but they tend to crater in bad markets. Staying away from sectors like retail, consumer goods and tech could save you from potentially devastating losses.
Short interest: Veteran traders and investors can bet against a company’s success by “shorting” the stock. These “shorts” represent people who see issues with a company’s business model and anticipate the stock plunging. Unfortunately, they aren’t always right — in fact, sometimes they’re very, very wrong. However, a company with a high “short float” has a large percentage of its shares held by people who expect the stock to fall. When you’re first starting out, there’s no reason to risk your money — stick to stocks with low short floats until you’re more comfortable with the process.
All investing involves risk, so there’s no guarantee that these stocks are going to perform in the coming years. However, they all have characteristics that qualify them for consideration as the best stocks for new investors. Each one offers a regular cash payment to shareholders (aka a dividend), represents a company worth at least $10 billion, comes from a “defensive” sector and is currently showing high profits based on the assets that it holds.
Apple Inc. (AAPL)
Share price: $175.08
Market cap: $2.87 trillion
Year-to-date change: -6.46%
2021 revenue: $365.82 billion
2021 net income: $94.68 billion
Dividend yield: 0.50%
Apple is the largest company in the world in terms of market cap — it’s one of only five U.S. companies with a market cap greater than $1 trillion and one of only two with a market cap greater than $2 trillion.
Coca-Cola (KO)
Share price: $60.45
Market cap: $260.50 billion
Year-to-date change: 1.7%
2021 revenue: N/A
2021 net income: N/A
Dividend yield: 2.79%
Famously one of Berkshire Hathaway CEO Warren Buffett’s favorite investments, Coca-Cola is a good example of a consumer staple that performs well even during economic downturns.
Costco Wholesale Corporation (COST)
Share price: $522.03
Market cap: $233.20 billion
Year-to-date change: -6.99%
2021 revenue: $195.93 billion
2021 net income: $5.01 billion
Dividend yield: 0.60%
Costco is one of the most successful retailers in the world and the king of the membership wholesale club hill. Costco’s business model seemed almost purpose-built for the pandemic, and the company has been cleaning up since the outbreak of the virus in 2020. Last year, income from membership fees rose 11.7% to $1.23 billion — more than double the 5.3% gain from the year before, according to Supermarket News.
Home Depot is making investors smile, according to Seeking Alpha. The company continues to beat Wall Street expectations. It grew revenues by nearly 10% last year, it beat the Dow by more than 122% over the last 72 months and has increased its dividend for 12 years straight.
McDonald’s Corp. (MCD)
Share price: $262.08
Market cap: $ 195.61 billion
Year-to-date change: -2.51%
2021 revenue: N/A
2021 net income: N/A
Dividend yield: 2.11%
McDonald’s is one of a handful of stocks known as “Dividend Aristocrats,” as are some others on this list. To be a Dividend Aristocrat, a company must raise its dividend every year for at least 20 consecutive years. McDonald’s has actually raised its dividend 44 years in a row, every single year since it became a public company.
Merck Inc. (MRK)
Share price: $81.67
Market cap: $206.29 billion
Year-to-date change: 5.28%
2021 revenue: $48.0 billion
2021 net income: $7.067 billion
Dividend yield: 3.41%
Merck is one of the world’s largest pharmaceutical companies. Recently, it emerged as a leader in the treatment of COVID variants when it unveiled a drug with the promise to combat Omicron and any other strain, according to Reuters.
Microsoft Corporation (MSFT)
Share price: $314.98
Market cap: $2.40 trillion
Year-to-date change: -4.63%
2021 revenue: $168.09 billion
2021 net income: $61.27 billion
Dividend yield: 0.78%
Microsoft is one of the largest companies in the world — it’s the other $2 trillion company behind Apple — and its ubiquitous Windows software is installed on personal computers in every corner of the Earth. The company has kicked into a new gear recently with booming cloud services revenues and partnerships with autonomous vehicle makers.
PepsiCo (PEP)
Share price: $174.09
Market cap: $240.72 billion
Year-to-date change: 0.64%
2021 revenue: N/A
2021 net income: N/A
Dividend yield: 2.47%
PepsiCo, the primary competitor of Coca-Cola, is another consumer staple that pays a strong dividend and has a very stable balance sheet.
Sysco Corp. (SYY)
Share price: $78.43
Market cap: $39.84 billion
Year-to-date change: -0.82%
2021 revenue: $51.30 billion
2021 net income: $524.21 million
Dividend yield: 2.42%
Houston-based Sysco makes and sells food-based products to the food service industry.
Summary
While taking more risks to earn greater rewards is part of what investing in stocks is all about, easing yourself into the field may be essential to making your experience a positive one. To familiarize yourself with the process, consider sticking to conservative, relatively safe stocks and creating a portfolio of defensive stocks at the beginning. You can always build out your portfolio to include bigger, riskier investments later on. If you decide to start branching out, a solid base can make it easier for you to experiment and take on a bit more risk.
FAQ: Investing as a Beginner
Financial markets can be confusing, so here are some quick answers to some common investing questions.
What kind of stocks should I invest in as a beginner?
There’s never a surefire path to picking the right stock, but sticking to defensive stocks that have low volatility and pay a dividend is a good strategy while you’re still learning about investing.
How much should beginners invest in stocks?
You should only start investing in stocks after you’ve paid off your high-interest debt and built up an emergency fund with about six months’ income. Even then, move slowly so you don’t overcommit — try to make sure that you never have more money invested in stocks than you can afford to lose.
How do I start investing in the stock market as a beginner?
You’ll need to find a broker who can take your orders and buy stocks. Begin by looking at the best brokers to get a better sense of what type of services are available and the sort of costs you should expect.
Which are the best safe stocks to invest in for beginners?
Again, there’s no real answer to that question because you won’t have guarantees in the stock market. However, the best safe stocks for beginners are generally large companies in defensive sectors like utilities, consumer staples (e.g., food, beverages or toiletries) or healthcare. These stocks have a good chance of protecting you from excessive risk.
Do I need a financial advisor to start investing?
Definitely not. While a financial advisor can play a crucial role in building the sort of investment portfolio you’ll need to retire comfortably or send your kid to college, much of the information they provide can be found on your own. If you’re investing limited sums of money, the downside of doing your own research and starting without an advisor is pretty small.
Which is the best app for a beginning stock investor?
Robinhood allows you to buy specific stocks without charging a per-trade commission, making it a great option for beginning investors. That said, there are many different investing apps, each of which offers its own unique set of features and costs. You should take the time to explore your options before settling on one.
