For beginner stock investors, figuring out the ropes of investing and trading stocks can often feel like a daunting if not impossible task. There are a vast number of factors to consider when making a foray into the financial world and none of them are guaranteed to bring you success.
Central to the process of learning the basics of investing is understanding the difference between safe stocks and high-risk stocks. Investing in safe stocks is the best way to yield consistent dividends that are unlikely to fall in value. High-risk stocks can lead to life-changing payouts, but they can also drastically fall in value.
Having money invested in stocks can be a great way of earning extra income, but even the safest of safe stocks stand a chance of losing you money. So how do you find safe stocks that minimise your risks as a beginner?
Of course, you can seek financial advice from advisory or brokerage services. But increasingly, people are looking to manage their own investments and get started on their own. So, for any budding investors out there, join us as we discover how to find safe stocks for beginners.
How to find safe stocks for beginners
The best safe stocks for beginners (and any investors for that matter) are generally from large companies in defensive sectors such as the healthcare industry, consumer staples, and utilities. These stocks are usually fairly stable as they are in markets that are likely to remain consistently in demand regardless of external circumstances.
However, it should be stated, that no matter how stable the market or how safe the stock is, investing involves risk and there is always a chance that you can lose money on stocks. The stock market is, in a sense, a gamble and it is wise to remember this before investing in anything.
So let’s now jump in and take a closer look at safe stocks and find out what they really are.
What are safe stocks?
Safe stocks, or risk-free stocks, are shares in a company that is likely to remain stable and consistent over a period of time.
Stocks – sometimes used interchangeably with the word “shares” – are securities that represent the ownership of a company and how it is shared between everyone who has invested in it. If you own stocks in a company, it means that you own a portion of that company’s assets. Every year, or every quarter of a year, companies pay dividends to shareholders that represent a portion of each company’s revenue relative to the number of stocks owned by a shareholder.
People can buy and sell stocks on the stock exchange. While some choose to regularly trade their stocks, others prefer to invest in companies and use the dividends as a source of income.
Safe stocks are unlikely to have big dividend returns, but they are also not likely to fall in value either. Their relative safety is defined by their consistency and stability.
However, as we previously discussed, no stocks are entirely safe.
For example, Enron was a huge energy company in the US with over 20,000 employees and annual revenues of over $100 billion. After a scandal in 2001 known as the “Enron scandal”, the company went bankrupt and thousands of investors lost over $74 billion collectively.
The collapse of Enron now stands as a good example of how investments that seem very safe do still run the risk of losing vast amounts of money.
How to buy stocks
To start investing and buying and trading stocks on stock markets, you need to have an investment account. You do this by opening an account with a stockbroker.
Stockbrokers are generally split into two categories: full-service brokers and online/discount brokers.
Full-service brokers offer investment advice on your stock portfolio and are what many people think of when they think of stockbrokers – smart business types discussing stock investments in luxurious offices with their wealthy clients. Full-service will either take a cut of whatever money your investments make, charge a flat service fee, or charge a combination of the two.
Online/discount brokers simply allow you to open an online brokerage account and manage your investment portfolio yourself. Many online brokers do not charge for their platforms, though some require a fee per investment you make.
Online/discount brokers have become increasingly popular in recent years as they allow regular people to buy and trade on the stock market simply by using the app on their computer or their phone.
Top tips for finding safe stocks
Understanding financial markets, stocks, investments, and trading is undeniably complicated. It is important that you don’t jump in and make purchases before you have familiarised yourself with some key considerations.
Here we will explore a few different tips that should be able to help you navigate the complex world of the stock market and simplify the process of finding safe stocks.
Research the industry
Before you decide what stocks to buy, you will have to pick an industry you want to trade in. The health and stability of the overall industry are arguably even more important than the success of the individual stock itself. If a single coal company falls upon hard times, that may just be due to the cut and thrust of the competition in that market. However, if the whole coal industry starts to decline, then it is probably best to withhold your investment.
Some industries are more consistently stable than others. For example, commodity companies have less in their control in comparison to other industries. If there is a poor harvest and relative dearth in the supply side of wheat, then that is going to drastically affect the wheat market. The quality of the harvest is unpredictable, so investing in wheat and other such commodities is not the safest endeavour.
As we saw earlier, industries that are likely to be secure in most circumstances, such as healthcare, utilities, and consumer staples, are often a good place to start.
Avoid small companies
Companies with a market value of less than $2 billion (£1.6 billion) are known as “small-cap stocks”.
Small companies often tend to be newer companies that are still in the early stages of development. Unfortunately, the harsh reality of the business world is that most companies fail, which means most small companies would be a bad investment as a large number of them won’t ever make it to becoming an established corporation.
Of course, if you pick the right small company, you could stand to make huge amounts of money. Think of all the people who invested in Facebook, Microsoft, Tesla, Amazon, etc., before anyone had heard of them. But, as with any high-stakes gamble, this is unlikely to happen and is by definition not a safe investment.
Companies that have a market value of over $10 billion (£8.2 billion) are a safer bet as they are more established and should, therefore, be more stabilised. However, there are plenty of examples of big companies crashing, so remember that it is always a gamble to some degree.
Keep up to date with world events
All industries are impacted by real-world events to varying degrees. War, the economy, elections, the environment, and multiple other factors can all have a major effect on the stability of a given market.
Understanding how such events and issues can impact markets is a skill in its itself, but there are some generalities that can be applied to most situations.
For example, knowing where oil and gas companies get their supplies from is important as resource-rich regions, such as the Middle East and Russia, can be politically volatile which can lead to a dearth on the supply side and massively impact the stability of the market.
Avoid cyclical stocks
Cyclical stocks are stocks that are heavily affected by macroeconomic trends. Because the economy generally runs through a boom and bust cycle, so too do cyclical stocks.
For example, buying stocks in cars may be a great idea when the economy is booming as consumers have disposable income to spare and there is the confidence to buy new products. However, if the economy is in recession, then people are far less likely to buy new cars unless they need to.
Work out the stock’s dividend payout ratio
The dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders in comparison to the net value of the rest of the company. Essentially, it means how much is the company paying shareholders relative to how much is being put back into the company.
If you take the annual dividend payout figure and divide it by the company’s annual earnings per share, you get the payout ratio.
Generally, more stable companies will have higher payout ratios as they are more established and require less money for rapid development. Newer companies usually have a lower payout ratio as they need to continually reinvest profits to ensure they continue to grow.
Again, if a company has high revenues and relatively low dividends, this could be a sign that it is on the rise as it is making big money and pumping it back into development. However, although this could turn out to be a profitable investment, a rapidly growing company isn’t normally big enough to be classed as safe.
Evaluate the corporate history of a company
Many companies publish their corporate press releases on their websites. You should also branch out and find shareholder reports as well as anything else you can find online that has been written about the performance of the company.
All companies will have periods in which they perform badly, but it is also good to check how the company responded during that down period. Did they adjust their dividend payout? Were they then able to return to their previous levels of growth and payouts?
Evaluating how a company responds to a crisis, big or small, is a good indicator of how safe the stocks are.
Start with what you know
It is always wise to begin investing in stocks that are in a market that is familiar to you. This doesn’t mean you have to understand the market inside out, but it may mean you are familiar with the company or that you already buy from them.
Having stocks in a market you know nothing about means that you are less likely to understand the ups and downs of that world and how it is affected by wider trends.
For example, the tech industry is an attractive investment market as it is experiencing such a boom and is expected to continue to do so. But if you know nothing about tech, then investing in the market may not be the best idea.
Summary
Knowing how to expertly navigate the stock market can take years which is why many people opt to employ the services of a stockbroker to do it for them. Increasingly, however, individual investors are making use of online brokering platforms and choosing their own stocks to buy.
If you choose to do this, it is important that know how to carry out the necessary research and company evaluation before you make any purchases. Although there are some markets that are safer than others, no investment is entirely risk-free and each comes with the potential to lose money.
Following our beginner’s guide to finding safe stocks should help you to get started at the beginning of your investment journey.