Investing for beginners can seem like a daunting task. However, with the proper analysis, new investors can make the best choices to build their portfolios. This TradingSim article will walk beginning investors through how to start building and rebalancing their portfolios. Portfolios are a collection of stocks and other assets. This article will also help investors pick the best stocks for an investment strategy.
Table of Contents
Why should people start investing?
There are many reasons why people should start investing and building a portfolio by investing in stocks. Stocks are a piece of a company that helps people feel ownership of a corporation. If stocks are performing well, an investor’s wealth will increase as well.
Many people start short-term investing for a quick profit, like day trading stocks. Some want to invest for long-term goals, like buying a house or for eventual retirement. Regardless of the reason, beginning investors should set some money aside in an investment account to build wealth creation and save for their futures from the returns. Returns are the profits from stocks.
What financial terms should investors know?
Some popular terms are used on Wall Street. Here are some of the most common ones.
New York Stock Exchange (NYSE) is the main stock exchange in the U.S. Many stocks are traded on this platform from 9:30 AM EST to 4:00 PM EST. Many stocks trade under ticker symbols like GM. GM’s symbol is yes, GM. So, if an investor is looking for GM stock on a ticker, the symbol would look like this:(NYSE:GM).
Nasdaq(NASDAQ). Nasdaq is the second-biggest stock exchange in the world. Many large tech companies are traded on this exchange, including Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG).
Value stocks are stable, low-cost stocks that sell below their worth.
Growth stocks are stocks that usually outperform the general stock market. They are often more volatile, but have higher returns, or profits, for investors.
A bull market is when the market is rising by more than 20%. If a financial analyst is bullish on a stock, that means they think the stock is worth buying and its stock price will increase. If a stock’s price increases, that makes it more valuable and gives more returns to investors.
A bear market is when the stock market falls by more than 20%. When a financial analyst is bearish on a stock, that means that they think the stock should be sold and its stock price will fall. When a stock price declines, the profitability decreases and gives fewer returns to new investors.
What platform should beginning investors choose?
Millennial investors who are comfortable with risk should find independent trading apps like Robinhood easier for them to use. However, more risk-averse beginning investors may want more financial education along with their investments. In that case, they may want to use more traditional brokerage firms like TD Ameritrade. Those firms often have zero-commission costs for U.S. stocks. However, there are fees to trade foreign stocks.
Robo-advisors can also be used in investing for beginners. For novice investors who want a hands-off approach, robo-advisors like Ellevest offer investment services through algorithms. They take investors’ financial goals and builds a portfolio based on the information. The robo-advisors’ fees are usually 0.25% of an investor’s portfolio.
How much money is needed for investing for beginners?
While there used to be a certain amount needed to invest with brokers, online trading apps have greatly reduced that number. Some investing apps like Robinhood have zero commission fees. However, they charge a $5 fee for an upgraded membership to have access to invest on margin. Investing on margin means borrowing from a trading platform to invest in stocks. Sounds crazy, but whoever would have thought 20 years ago we would need membership software companies like Wellyx to manage gym members.
Shark Tank star Kevin O’Leary notes that investing can be enhanced by setting aside money from income. He suggests beginning investors start putting money into the markets instead of buying unnecessary items. He suggests setting aside $100 a week for investment.
“What I’ve learned to do, and what has really helped me in maintaining growth in my own personal investing is, anytime I pick up something I’m going to buy, I say to myself, ‘Do I really need this?’ Because if I don’t buy it, the money is going to be invested and make money every year for me while I’m sleeping,” said O’Leary.
New investors should always have an emergency fund set aside. When investors have emergency funds for stocks, there isn’t as much of a rush to buy or sell stocks based on rash decisions.
Should investing for beginners follow the stock market?
In a bear market, stock prices plunge by 20%. In a bear market, stocks rise by 20%. While some investing for beginners may involve emotions at first, research is key. Because the stock market has so many ups and downs, new investors should not panic sell their stocks in this current recession.
“You will never, ever, know the bottom. You will never, ever, know the top. Fortunes are going to be made out of this time. So just stay calm. I can guarantee you that if you stay in and you just stick with it, three years from now you will be very, very happy that you did,” said Orman.
While monitoring the stock market is crucial, new investors shouldn’t just buy or sell stocks based only on the way the stock market is moving.
What taxes do investors pay for stocks?
Taxes are due when investors sell their stocks for a profit. Those taxes are capital gains taxes. There are two types of capital gains taxes. Short-term capital gains are taxed at a higher rate than long-term capital gains.
Capital losses are the opposite of capital gains. When investors sell an asset for less than they paid for, they have to pay taxes on those losses. However, reporting the capital losses can help with lowering a tax bill. If an investor sells one stock at a profit, the losses can be subtracted from the gains to lower the tax liability.
What options are best for investing for beginners?
There are many options that new investors can choose other than stocks. Below are some of the most popular ways that they can get started with building their portfolios.
Bonds often a safer investment for new traders
In addition to stocks, beginning investors can buy bonds through trading apps or brokerage firms. Investors can also purchase bonds through the U.S. Treasury’s website.
When the Treasury issues government bonds, When investors choose bonds, they are giving a loan to the government. The government promises to pay an investor back with interest when the bond matures. There are Treasury bonds that investors can hold for two, five, 10, even 30 years.
“It’s driven largely by one’s time horizon. For example, if one is accumulating a down payment for a home and plans on accessing the funds in say, two years, one should not invest in a 10-year bond. If you mismatch the maturity and the time horizon, you run the risk of losing money even though Treasury securities are risk- free,” said Johnson.
Corporate and municipal bonds another way to invest
Municipal bonds are another option for investing for beginners. Municipal bonds are government debt securities that are bought by investors. The bonds are loans to the government that are used to fund local roads, bridges, and libraries.
In addition to municipal bonds, new investors can buy corporate bonds. Corporations issue bonds to increase capital to fund expansion. With corporate bonds, there are often higher yields than with bonds or CDs.
However, beginning investors have to watch to ensure that corporate bonds have high credit ratings. If corporate bonds are rated AA or AAA, then they are the safest options for beginning investors.
In addition to stocks, bonds are a safe way to increase wealth. Bonds are much more low-risk than stocks, but the payout isn’t as high as it is with stocks.
Stocks and bonds can lead to diversified portfolio
When investing for beginners, they can buy a mixture of stocks and bonds. The blend of assets can lead to a portfolio that is evenly balanced. If an investment portfolio has too many stocks, investors can lose a lot of money if the stock market tumbles.
The “100 rule” usually informs investors on how much to invest in stocks and bonds. If an investor is 30 years old, subtract 30 from 100. In that instance, a new investor allocate 70% to stocks and 30% to buying bonds. With that balance of stocks and bonds, a beginning investor can build their portfolios.
CD’s another low-risk way to invest
Certificates of deposit (CD’s) are another low-risk way to invest for beginners. These certificates are usually issued by banks and offer higher interest rates than regular savings accounts. Similar to bonds, CD’s are fixed instruments that must be held for a certain amount of time.
For example, a one-year CD at Chase Bank can be purchased at 1.25% interest. If a beginning investor waits a year and redeem the CD, an investor will receive the investment with interest. When an investor makes an early withdrawal, there are usually penalties to pay.
ETFs another option for investing for beginners
Exchange-traded funds (ETFs) are another investment option for starting investors. The funds are a collection of assets, usually stocks in one specific industry. When trying to decide whether to choose stocks vs. ETFs, diversification is best. Choosing both stocks and ETFs can lead to a more balanced and possibly more profitable portfolio.
401 K’s are common entryway for investing for beginners
For many beginning investors, their employer-based 401K’s are their first introduction to the stock market. With 401K’s, a percentage of an employee’s paycheck is invested in an employer-provided retirement plan. The employee’s contributions are usually invested in mutual funds. Mutual funds are companies that pool money together to buy shares of a collection of stocks and bonds.
Many 401K’s are great ways for investors to save for retirement by delving into the stock market. They are tax-free except if employees make withdrawals from the funds. Beginning investors should ideally invest 10% of their income into 401Ks to increase wealth creation and have more income when they retire.
What criteria should be included for stocks for new investors?
New investors shouldn’t just blindly choose stocks. They should look for certain factors to determine that the stocks they buy are the best to help build income.
High dividends. Dividends are quarterly payments that companies pay to stockholders every quarter. These payments are usually proof that the stock is a reliable one that offers extra income to investors.
Track record of profitability. When investing for beginners, they should pick stocks that have strong profits for many quarters. Checking a company’s earnings report every four months to determine a corporation’s profitability.
Diversity in business. The best stocks for new investors should not just focus on one industry. For example, an investor only has hotel stocks. If the hotel industry falls, then an investor’s portfolio suffers as well. It’s important to pick stocks that have diverse interests that are better able to survive the unpredictability of the stock market. Stocks like Uber(NASDAQ:Uber) that have diverse interests as ride-sharing and food delivery service Uber Eats are better choices for investing for beginners.
If an investor just wants to stick to stocks, here are 10 of the best options for investing for beginners.
1. Berkshire Hathaway is top stock for investing for beginners
Berkshire Hathaway(NYSE:BRK-A) is a dependable stock that can pay off for a new investor. The firm is led by legendary investor Warren Buffett. Berkshire Hathaway has made investments in reliable and profitable stocks.
Berkshire is a company with diverse holdings that are some of the most prominent companies in the world. Coca-Cola, Apple, and American Express are just some of Berkshire’s investments. Buffett himself touted his company’s stock.
“I happen to believe that Berkshire is as about as sound as any single investment can be in terms of earning reasonable returns over time,” said Buffett.
“We are very proud to be adding such a great portfolio of natural gas assets to our already strong energy business,” said Buffett.
Darren Pollock, a portfolio manager at Cheviot Value Management, invests in Berkshire because he that the investment shows that the company is willing to make investments to build up its weak parts of its portfolio.
“I’m inspired to see that, given that he’s bearish, he’s still willing to make acquisitions where he thinks it makes sense and where it meets Berkshire’s hurdle points,” said Pollack.
Berkshire Hathaway is a buy for financial experts
Berkshire is a buy because of its large cash reserve. Billionaire investor Bill Ackman purchased many shares of Berkshire stock because of its healthy cash reserves. A good cash reserve means that a corporation is profitable and withstand an economic downturn.
“Berkshire’s discounted valuation, large excess cash balances, and substantial margin opportunities at several key operating subsidiaries provided an attractive investment opportunity,” said Ackman.
Ackman also believes that Berkshire can overcome the COVID-19-caused recession.
“We[investors] believe that Berkshire will not be materially negatively impacted as a result of the [coronavirus] crisis. Rather, we believe that Berkshire will emerge from this crisis as a more valuable enterprise as the market decline will enable it to invest a substantial portion of its cash,” said Ackman.
Berkshire Hathaway’s strong record of choosing top holdings to invest in and large cash flow make the company’s stock a great choice for beginning investors.
AT&T(NYSE:T) is another good stock for investing for beginners. The telecommunications company has been around for over a century. AT&T has evolved to become a communications giant that pays high dividends to investors.
AT&T has high dividend payout to investors
AT&T’s dividend yield each quarter is 6.8%, which makes it a Dividend Aristocrat. That means that the stock is one of THE highest-paying stocks that pay dividends. The dividend yield means that the stock will give reliable extra income to new investors.
AT&T’s 5G adoption makes it a top stock for new investors
In addtion to its reliable dividend payments, AT&T stock is a good buy for investing for beginners because of its early adoption of new technology. Chris Sambar is executive vice-president of AT&T’s Technology Operations. He noted that the recent quarantine led to the company’s strengthening its 5G network.
“While many of us have been working from home for the past three months, AT&T’s network team continued to build and test our network so that we could emerge from this season with stronger, broader 5G coverage for our customers across the country,” said Sambar.
“Whether it’s getting you back to work, back to school, or back to play, we’ve got you covered with the fastest wireless speeds in the nation,” added Sambar.
With its high-paying dividend and expansion of 5G technology, AT&T stock is a top choice for investing for beginners.
Google’s(NASDAQ:GOOG)’s parent Alphabet is another top stock for investing for beginners. The company’s revenue increased 13% during the COVID-19 crisis. Google is the most dominant search engine and its diverse interests in self-driving cars and media ventures like YouTube make the stock one to choose for new investors.
Google is a buy for a top stock for investing for beginners
Many financial experts pick Google as a stock to invest in because of its diversified interests. Giverny Capital Hedge Fund rates Google as a buy, meaning that it encourages investors to purchase Google stock.
“Our largest holding at inception is Alphabet, representing 7.7% of the portfolio. The Google search engine advertising business strikes us as possibly the best business model on the planet. Management has used Google’s enormous profit engine to reinvest in the research and development of artificial intelligence, autonomous driving, cloud computing and other platforms for the future,” said Giverny Capital.
Morgan Stanley analyst Brian Nowak also is a good stock to add to investors’ portfolios.
“We[Morgan Stanley] are particularly positive on its emerging e-commerce products (shopping listings, virtual show rooms, deep linking, etc), focus on [small and medium-sized businesses], and efforts to drive digital transformation in the healthcare and education industries,” said Nowak.
Google’s investment in varied businesses and stable ad revenue make the stock a good choice for investing for beginners.
Apple (NASDAQ:AAPL) is one of the most valuable companies in the world with its ubiquitous devices. The tech company’s stock is a good investment for beginning investors because of its innovation.
Bank of America analyst Wamsi Mohan thinks Apple stock is worth buying because the company is making its own chips for its computers. Because Apple is making its own chips for its computers in-house, it saves money and increases the corporations’ profitability.
“Perhaps the biggest takeaway from today’s event was the reassurance that Apple is still driving innovation and new ways to use technology hardware and software,” wrote Mohan in a note to clients.
Mohan also thinks Apple is a good buy for investing for beginners because of the increased uses for its devices. He praises Apple’s “AirPods incorporating surround sound and spatial audio, the Watch supporting more health workouts, tracking user dance movements and tracking sleep.”
A Deutsche Bank analyst also thinks Apple is a strong buy for investing for beginners.
“Overall, we feel comfortable that AAPL(Apple) should continue to offer upside for investors,” noted the analyst.
Apple is at the forefront of technology because of its ability to innovate. Beginning investors should add Apple stock if they want to invest in a stock that’s always on the cutting edge.
5. Amazon is key stock for investing for beginners
While Amazon(NASDAQ:AMZN) is a pricey stock, the investment is well worth it for investing for beginners. The e-commerce giant has grown during the nationwide quarantine. Because of its diverse interests in e-commerce, cloud technology, and its Alexa devices, Mark Tepper of Strategic Wealth Partners rates Amazon stock as a buy.
“It’s the best diversified post-COVID play. They’re literally in every single business that’s going to thrive on a going-forward basis. You’ve got e-commerce, cloud, digital advertising, personal assistance,” said Tepper.
Tepper also believes that Amazon’s stock price should stay at its current hefty price because of the Federal Reserve giving money to many troubled banks and businesses.
“Normally, during periods of heavy investment for Amazon like they’re seeing right now, the multiple comes down, but apparently that doesn’t matter anymore when the Fed’s dishing out trillions of dollars like it’s going out of style. So, I think the best pick right here would still be Amazon,” added Tepper.
Amazon stock is a good choice for investing for beginners if they’re able to purchase one high-priced stock for long-term returns.
Microsoft stock (NASDAQ:MSFT) is a tech stock that would be good for beginning investors. The corporation has performed well with its Azure cloud technology. Amana Mutual Funds Trust rates Microsoft stock as a buy because of its diverse interests in cloud technology and popular Xbox gaming devices.
“Microsoft led the major technology stocks, enjoying multiple advantages. Strong growth from its Azure Cloud Services business will almost certainly continue as stay-at-home accelerates the transition to buy online. Nor would we rule out a bump in Xbox sales!” said Amana Mutual Funds.
Sextant Capital Corporation also notes that many more retailers will use Microsoft’s Azure Cloud Services as they sell more merchandise online. The upcoming announcement of new Xbox games later this summer may also drive sales of Microsoft hardware and will also help make Microsoft an attractive stock for new investors.
“If the pandemic leads retailers to ramp up their online competency, they will likely require cloud services and will be equally likely to not want to give that business to Amazon. Microsoft’s Azure Cloud Services will happily accommodate. Remote work may be driving software demand higher and it seems likely that hardware demand (read Xbox) increased during the quarter,” said Sextant.
In investing for beginners, Microsoft is a fairly reliable stock.
Visa (NYSE:V) is a relatively stable stock with a high dividend of 0.62% every quarter. The credit card company is part of the movement to a cashless society. Visa could be a good stock for investing for beginners because it’s at the forefront of digital payments. During the coronavirus, many people are using credit cards more.
Chief financial officer Vasant Prabhu noted that many consumers are using digital payments as social distanced shopping increases.
“There is certainly a growing tendency to not want to use cash. And also, of course, not even just a tap your card, the aversion to cash could be persistent, which means that even face-to-face transactions or penetration of digital forms of payment could be growing in a permanent and structural way faster than it might have prior to the crisis,” said Prabhu.
International growth make Visa a top stock for investing for beginners
“We’re seeing a massive acceleration toward e-commerce adoption,” said Forestell.
Visa is also expanded internationally by adding a payment feature to the popular social media network WhatsApp in Brazil. Through its Visa Direct payment system, people can send money to each other through the app. Visa touted the deal in a statement.
“Using our technology to open up avenues like WhatsApp for more people to shop and pay each other digitally is an incredibly powerful proposition that we’re excited to bring to life,” wrote Visa in a press release.
Visa’s international expansion and use of the most current technology makes the stock a top choice for investing for beginners.
8. Disney an established stock for investing for beginners
Disney (NYSE:DIS) is a world-renowned brand that’s a top choice for investing for beginners. While the coronavirus crisis has shut down many Disney theme parks, the slow re-opening of the economies could help Disney rebound. For new investors, Robert Bacarella, the founder of Monetta Financial Services recommends Disney stock because he believes it can recover from recent economic lows.
“Look to companies that provide services and products you use and which you believe should return to normal profitability once this pandemic is behind us. We currently don’t know the extent of the damage, but we do know that people will eventually shop again, go to restaurants, fly and even plan a trip to Disney or go on a cruise,” said Bacarella.
Bank of America analyst Jessica Reif Ehrlich also believes Disney stock is a buy when its theme parks re-open. She also thinks the corporation’s stock is worth purchasing because of its successful Disney Plus streaming service, especially its recent premiere of the Broadway blockbuster Hamilton. Disney also added many more viewers through ESPN’s Last Dance documentary about Michael Jordan and the ’90s Chicago Bulls. (ESPN is a Disney property.)
“Although Covid-19 pressures should continue to weigh on near-term financials, we believe Disney is positioned to grow stronger through the crisis (e.g., a faster Disney+ rollout, better long-term theme park margin potential and improved ESPN programming appeal) and numerous catalysts exist to drive growth higher,” said Reif Ehrlich.
Disney+ makes stock solid choice for new investors
“In late March as planned and despite COVID-19, we had an incredibly successful launch of Disney+ in Western Europe, followed by a highly successful launch in India. We announced in early April that in just five months, we had surpassed 50 million subscribers globally, a significant milestone for us. We’ve been quite pleased with the growth that we’ve seen in the four weeks since then and there is more to come,” said Chapek.
The diverse entertainment services that Disney offers Even though Disney’s stock price has fallen, the lower price could make the quality stock a more affordable option for new investors.
Pharmaceutical stocks are usually blue-chip stocks for investing for beginners. Blue-chip stocks have steady growth and reliable dividends. AbbVie(NYSE:ABBV) is a drug manufacturer that had sales increase by 10% in the first quarter of 2020.
“They[AbbVie] have a tremendous ability to potentially expand the uses of existing products that have already been approved, but also the potential for Humira to get expanded uses as well,” she said. “And, of course, the tie-up with Allergan along with other expanded product pipeline[s]. I think all those things, regardless of the politics, are going to be very, very positive for AbbVie,” said Sanchez.
Todd Gordon, managing director at Ascent Wealth Partners, also thinks AbbVie stock is a good buy for investing for beginners. He also thinks that the diversification of revenue will help increase its profits.
“The acquisition of Allergan was a great way to diversify revenue streams. They have large, private cosmetic drugs like Botox. And then European regulators cleared the deal with the U.S.,” said Gordon.
AbbVie’s stock is a good one for new investors because of its widely-used medicines and recent acquisitions that can expand its profits.
10. Clorox a good defensive stock for investing for investors
Clorox(NYSE:CLX) is a defensive stock that’s best for new investors. When investing for beginners, defensive stocks usually are strong regardless of an economic downturn. They usually have items that people will always need, such as Clorox’s cleaning products.
“Sales were up 11% for the quarter driven mainly by 60% volume growth as we saw very high demand from not just our cleaning and disinfecting products, but also our household essential household products. Growth was broad-based with double-digit volume increases in every single region,” noted Burhan.
Financial experts think Clorox is long-term stock for new investors
“We believe habits around disinfecting are changing for the long term, and that Clorox’s sales may NOT decline in the high-single digits in the second half of fiscal 2021 as the consensus is projecting,” said Bolton Weiser.
She also believes that increased demand will continue after the panic buying of the coronavirus ends.
“The majority of the higher demand for disinfecting products is coming from incremental household penetration, not just stockpiling or higher use by existing households,” said Bolton Weiser.
“While early, we’re encouraged to see from our data that the majority of the higher demand is coming from incremental households rather than just stockpiling or higher usage from existing users. With the pandemic expected to have a sustained positive impact on consumers’ disinfecting and hygiene habits, we’ll invest further in our brands, turn incremental usage into loyalty,” said Burhan.
Clorox is a relatively safe investment for new investors. The company’s products are household staples that people will repeatedly purchase. That stock is a good choice for investing for beginners.
Investing for beginners requires time and research
While investing in the above stocks can be lucrative, it won’t be easy. Investing for beginners requires time and patience. By choosing wisely and conducting research, new investors can pick the best stocks for them. By testing investment strategies and reading financial news blogs on TradingSim, investors can find the top stocks to help them have their best financial futures.
How to Use CANSLIM to Pick Explosive Stocks CAN SLIM investing is a certain investment strategy for stocks that was developed by William O’Neil, the co-founder of Investor’s Business Daily (IBD). CAN...