Would you like to learn about how to buy stocks for the first time?
Are you looking to dive into the market and wondering about the best stocks for first-time investors?
The stock market is one of the best places to turn assets into wealth over the long-term. According to Aswath Damodaran, finance professor at the Stern School of Business at New York University, the S&P 500, an index that’s considered a proxy for the total U.S. stock market, has generated an annual return of 9.6 percent between 1928 and 2014. This compelling long-term rate of return is a testament to the power of owning a slice of such corporations.
What to Look for When Buying Stocks for the First Time
It’s tempting to follow the talking heads on CNBC or listen to your brother-in-law when picking stocks for the first time. The idea of going with the herd is actually a recipe for disaster when it comes to investing. Picking stocks should be a disciplined task, not an impulse decision.
Thorough stock analysis can be a time-consuming and challenging endeavor. Here we’ll look at a few important characteristics that define the best stocks for first-time investors. Stock ownership is buying a slice of a corporation, so when evaluating a stock, you’re actually evaluating a business.
Following are characteristics of a good stock purchase:
- Company is growing revenues steadily.
- Company has viable plans for continuing growth.
- Company has a good position within the market.
- Company stock is fairly priced.
- Company might pay out some of its earnings to shareholders as dividends.
Where can you find this information?
- The corporate web page.
- Corporate filings with the U.S. Securities and Exchange Commission.
- Corporate press releases.
- Research sites such as Valueline.com, at a library or subscription.
The best stocks for the first-time investor will incorporate the above metrics: growth, market position, fair price and growing dividends. One caveat to consider is that the following stocks might meet all of those qualifications one day but not the next. That’s because corporations aren’t stable. Valuations change as investors bid up the prices of stocks, and even good companies go bankrupt.
Each stock recommended below will include the price-earnings ratio, a widely accepted valuation, or price tag on financial assets. The P/E ratio simply divides the price per share by the earnings per share. Alone this metric doesn’t tell you much.
When you compare the P/E ratio with the individual stock’s historical average and the overall market, you can get an idea if the stock is priced above average. In general, the higher the P/E ratio, the more expensive the stock. Just like a stock’s price, the P/E ratio is fluid.
9 Strong Stocks for First-Time Investors
We chose the following stocks for several reasons. All of them been around awhile. Most offer a dividend payment that will give you a cash flow. They are typically larger, well-known companies, which tend to be less volatile than smaller, younger companies.
That said, it’s important to realize that investing in the stock market will expose you to some risk, even if you’re investing in what are considered safe stocks for the first-time investor. The stock market will go up and down in price, even with safe stocks.
1. Berkshire Hathaway (BRK-A and BRK-B)
Motley Fool contributor Dan Dzombak recommends Berkshire Hathaway, Warren Buffett’s well-known baby. This company is a bit like a diversified mutual fund with ownership in many diverse, well-managed businesses. Insurance is the cornerstone, although the company includes ownership in Wells Fargo, American Express, Coca-Cola, IBM and many other stock market stalwarts. P/E ratio for Berkshire Hathaway’s two classes of stock: 16.95 for BRK-A and 16.93 for BRK-B.
2. Chevron (CVX)
Attorney Dan Caplinger, also of the Motley Fool, recommends this major oil company for newbie investors. With Chevron, you get exposure to energy operations, including refining, gasoline and all aspects of the industry. Currently, with energy prices in a slump, the new investor can buy shares in Chevron on sale. With a juicy yield of 4.3 percent, you’re also getting a nice cash flow. P/E ratio: 10.74.
3. Microsoft (MSFT)
This important technology company has a history of growing dividends, giving the investor a path to higher payouts. As a leading player in an important industry, Microsoft is a solid stock for the first-time investor. This company is recommended for first-time investors by Caplinger and Keith Noonan of the Motley Fool. P/E ratio: 18.96.
4. PepsiCo (PEP)
This household name dates back to 1895, and 22 of it brands generate more than $1 billion each in international sales. These stalwart brands include Lay’s, Tropicana, Quaker and Doritos. The company, although old, is innovative, looking to participate in the growing trend towards healthier drinks and snacks. Bill Maurer of Seeking Alpha recommends Pepsi, which promises a fat dividend. P/E ratio: 22.10.
5. 3M (MMM)
“Dividend aristocrats” are companies that have been increasing their annual dividends every year for at least the past 25 years. One of these companies is 3M, which makes tape, library systems, Ace bandages, Post-it notes and Scotch-Brite cleaning supplies. It’s recommended by Erik Volkman of Motley Fool. P/E ratio: 20.65.
6. Dover (DOV)
Dover is one of the most important companies you’ve never heard of. This company wins a spot on the list due to its favor among successful mutual fund managers, as compiled by Morningstar. Dover focuses on four areas: refrigeration and food equipment, energy, engineered systems and fluids. With this type of broad diversification, the company has a foothold in many industries. P/E ratio: 14.34.
7. MasterCard (MA)
MasterCard — another pick of top fund managers, according to Morningstar — is a revenue-generating machine. The MasterCard business model claims a payout every time a transaction is funneled through its network. MasterCard is also participating in new mobile payments platforms. With most of the world still transacting business in cash, there’s a lot of room for the company to grow. P/E ratio: 29.02.
8. Starwood Property Trust (STWD)
This high-yielding commercial real estate investment trust has “a place in everyone’s income portfolio,” according to Seeking Alpha. Owning shares in this company gives the investor access to the real estate asset class as well as a juicy income stream. REITs are required by law to payout at least 90 percent of their taxable income in dividends each year, which explains the fat dividend. P/E ratio: 10.45.
9. Apple (AAPL)
Apple is a favorite of Louis Navellier, a portfolio manager and editor of the Blue Chip Growth and Emerging Growth stock market newsletters. In an InvestorPlace media posting on Nasdaq.com, he suggested Apple because it has been increasing its dividend and stock buyback program.
According to Morningstar analyst Brian Colello, Apple is a pro at mixing hardware, software, services and third-party apps into a variety of devices. This strategy gives Apple the support to charge premium prices. P/E ratio: 15.90.
Keep Reading: How to Invest Like Warren Buffett
How to Buy Stocks for the First Time
Buying stocks for the first time is quite easy.
Use an online discount broker, such as TD Ameritrade, Schwab, Fidelity or E*Trade. Choose one with a minimum investment that you can afford. Check out trading costs as well. You can apply online or call the company, and a representative will walk you through the process.
After the account is open, you will have a dashboard where you can view your account. Choose from a menu item that says “trade.” Type the ticker symbol. Fill in the boxes that ask for number of shares or amount. You will be asked to review and confirm your order before it’s placed.
After you place your order, go to the confirmations page to see if your shares order was filled and your shares were bought. This step might take a few minutes to complete.
If you have any questions, the online discount brokerage firm representative will be happy to walk you through the entire process.
Stock Market Tips for Beginner Investors
- Diversify. Invest in stocks from a variety of industries, so that when one industry is having trouble, another one will be healthy, propping up your complete portfolio.
- Watch valuations. The best stock is no winner if you overpay.
- Tune out the noise. Avoid checking prices and news on your stock every day. It will make you crazy, cause you to doubt yourself and possibly over-trade. Don’t let others or your own fears cause you to act irrationally.
- Invest for the long term. Don’t expect your stock to increase in value immediately. Pick good stocks and hold for the long term.
Final Advice Regarding Stocks for the First-Time Investor
After purchasing the stocks, your work is not complete. You need to monitor your stock.
Periodically, gather current information about the company. Visit the corporate website, look at company news and periodically check the P/E ratio. Read what the management is saying about the company.
Make certain to check the fundamentals of the stock every quarter. Look at the reasons you purchased the stock in the first place. Make certain that your initial assumptions are still valid. If you bought the stock based on an Asian expansion and the company is pulling back from those plans, you might want to reconsider your stock purchase.
If the stock turns out to be a big disappointment, if your initial evaluation was wrong or if the stock tumbles and doesn’t look like it will improve, then don’t be afraid to sell.
Finally, investing in the stock market requires research, study and ongoing monitoring. Over time, you will earn income from stock dividends and increase your assets with capital gains. And don’t worry, on occasion, all investors experience a loss here and there.