As a novice investor, it can be daunting to try and figure out the best places to invest your money. For this reason, many people who are new to investing prefer to find safe and reliable stock to buy so that they can find their feet.
The COVID-19 pandemic and the following rising interest rates and inflation have shown that there is no way to predict the future of the economy against unexpected situations. However, this doesn’t mean that there aren’t some industries and companies that can’t offer more reliable places to invest your money than others.
In this guide, we’ll walk you through the characteristics of stock and the industries that are generally considered stable enough that they offer so-called ‘safe’ stock.
What is considered safe stock?
While there are no stocks and shares that are considered completely without risk, there are some investments that have a lower risk level. It bodes well when companies are well-established and have steadily growing revenue, as their stock will also be stable.
There are certain industries that are usually safe to invest in, although you should be careful not to invest all your money in one company. The US government offers Treasury bonds, which are considered safe as they are predictable and a guaranteed fixture. In the same way, an asset class such as the food industry is guaranteed as it caters to an essential part of everyday life. The textile industry is another safe option as clothes will always be in demand. Other reliable industries include water, healthcare and technology for similar reasons.
Continue reading to find out what factors you should look at when considering which stock to buy, as well as what could affect the value of stock and the state of the stock market.
What are the characteristics of safe stock?
There are various trends to look for when you are considering which stock to invest in. It’s important that you research the company that you are buying stocks from as they are one of the indicators that can show whether their stocks have promise or not.
Take a look at the company’s history and see if its revenue steadily increases on an annual basis. If the revenue is erratic, the stock price is more likely to be unpredictable as the two are closely correlated. Consistent revenue is a sign that the stocks are less volatile and therefore have a lower risk.
Free cash flow is also a good sign, as this means that the company has leftover money after paying the operations costs. Durable competitive advantages also increase the likelihood that the company and stocks will thrive. These advantages can come in many forms, such as a well-known brand name or cost-effective manufacturing processes.
A brand such as The Walt Disney Company is famous throughout the world for its movie franchises, theme parks, and various other components that form the entertainment giant. Share prices for its streaming platform Disney+ have remained resilient, even throughout the COVID-19 pandemic, while its theme parks thrive in most economic climates. For these reasons, a well-established brand like The Walt Disney Company is fairly safe to invest in.
Apple has also built a loyal customer base that repeatedly buys its products, even when there are more affordable alternatives on the market. The products are designed to work best in conjunction with each other, which further encourages customers to turn to Apple for their technological needs. This durable advantage cements the pricing power of the company and ensures that they have steady revenue and stable stock.
Another thing to consider is the company’s dividend history, as it can help you to gauge the company’s long-term stability. Companies that never or rarely cut their dividend and are prone to increasing their payout (even in unstable economies) have good prospects for the future.
How can I find safe stocks and shares?
Before you start to look for stock to invest in, you need to consider the goals you have for your portfolio. If your goal is to gain good returns as quickly as possible, you may be interested in stocks with higher risk levels. However, if you are looking to generate a passive income for your retirement, you may want to consider low-volatility stocks that could generate steady returns. This type of stock will usually come from established companies that have steady annual revenue and net income.
A good way to keep an eye on the available stock to see what’s available is to regularly read updates on the market through the financial news and industry blogs. You can also try and find past financial papers on the company (where possible) to see how well it performs on an annual basis, as well as how it is impacted by different economical climates. This can help you to prepare for various eventualities as you will be able to predict different outcomes.
It’s important to remember that there’s no way to guarantee the performance of stocks, no matter how reliable they may seem. There are a number of factors that could affect a company’s performance, so the best course of action is to diversify your portfolio as much as possible so that you won’t be hit too hard if a particular industry is affected.
What types of stock are higher risk?
There are some types of stock that carry more risk than others. One of the most well-known types is cryptocurrencies, as they are very volatile and largely unregulated. Bitcoin stocks have surged and dramatically fallen in a short space of time, with share prices falling by around 70% in June 2022.
Penny stocks are also considered high risk, as they experience low trade volumes and many are part of fraudulent schemes. These types of stocks aren’t always accompanied by enough information about the company for potential investors to make well-informed decisions either. They can garner high rewards, but many people believe that the risk outweighs the potential benefits.
Another highly volatile type of stock is commodity stock, which is offered by companies that deal in raw materials such as oil and metals. The commodity industries are largely influenced by economic growth, which means that many investors sell their stock once there are signs of slowing growth.
Hedge funds are also considered high risk as there isn’t a defined area of stocks that they can invest in. The idea is that a group of experienced investors pool their funds to try and get high return rates through whatever means possible. As expected, this usually involves investing in high-risk stock as they have an increased chance of high return.
Hedge funds are also exempt from government regulations, which means that their investors aren’t given the usual type of protection that is given to standard investors. This is because there are usually set criteria that investors must meet (such as earning over $200,000 per year), which only attracts sophisticated investors.
Although there are drawbacks to high-risk stocks, there are also benefits to investing in stocks that have a higher risk level. They offer an increased chance of higher returns, which means that you could expect better returns if the stocks perform well. Many investors try to avoid high-risk stocks, however, as there is a greater chance that they will lose their money. There isn’t a guaranteed relationship between the risk and reward, which means that the above-mentioned stocks aren’t what most people would consider ‘safe’.
What are the characteristics of high-risk stock?
The main characteristic that attracts investors to high-risk stocks is the increased chance of high returns. However, there is no guarantee that stocks will meet an investor’s expectations, and they could end up losing them money instead. In some extreme circumstances, you could be at risk of losing all of your money or even end up owing money. This combination means that only the most experienced investors should consider high-risk stocks because they will know what to expect.
It can also be harder to access your money if you have invested in high-risk stocks. They usually offer lower liquidity levels than less risky investments, which means that you could struggle to access your money if the stock performance doesn’t meet your expectations or there is a major shift in the market.
Some high-risk stocks are also based on assets that aren’t involved in active trading, such as land banking schemes. This could make it difficult to access your money at short notice or you may encounter fees or penalties from the investment provider.
Another feature of high-risk stocks is high volatility. High-risk investments are often based on market confidence, which can vary on a daily basis. During times of economic uncertainty, the state of these stocks is more fragile, which can affect their value more than mainstream stocks.
Regulatory bodies don’t always protect investors from various high-risk stocks, such as cryptocurrencies. This means that you are more vulnerable if there are problems with the stock and you may lose more money.
Why should I buy stocks and shares?
There are several benefits to investing your money in stocks and shares. One of the main attractions is that they can offer better returns than alternatives like gold and treasury bonds (which are long-term fixed-interest bonds that are issued by the US Treasury Department). The average annual return for investors is approximately 10%, which is based on data from the S&P 500 stock market index. In comparison, government bonds have given between 5% to 6% annual returns on average.
The stock market is also prone to outpacing inflation, as company revenue and profits often increase after a short period of adjustment. You can also build a diversified portfolio by investing in stocks from different industries. This will help reduce risk levels as the factors that affect one type of stock or industry is unlikely to affect the other types. In some circumstances, the negative impact on one type of stock could increase the revenue and return for stock in another industry.
Another benefit of buying stocks is that it’s common for companies to pay dividends or portions of profit to their investors. These dividends can help form part of your passive income for your retirement or other projects.
Finally, one of the benefits of stock is that you can invest your money in a company that you already love or feel passionate about watching it grow. Well-known and stable companies can provide safe stocks to buy and potentially decent dividend yield for the foreseeable future. On the other hand, start-up companies can initially have higher risk levels, but you could benefit from larger rewards as the company grows and becomes more established.
What affects the stock market?
Stocks rise and fall due to a number of factors, but one of the main reasons is supply and demand in the market. High demand occurs when investors are confident about a company’s prospects and potential growth. This demand pushes prices up, especially if there is a growing attraction to a particular product or industry.
For example, car manufacturers that are producing electric vehicles may have seen increased interest because the overall perception of the EV industry has improved in recent years. However, the opposite can also be true as negative opinions expressed by the press can influence investors to sell their shares in certain companies. This will push down stock prices, which could mean some investors lose money.
The state of the economy also has a large influence on the stock market. Investors may sell their stocks if they anticipate an economic slump, while there is likely to be a higher demand for stocks as the economy begins to recover or experiences a boom.
It’s important to remember that there’s no such thing as 100% safe stock. The global economy can have a massive influence on your investments, which in itself is influenced by numerous factors. High-growth stocks can seem appealing at first, but they aren’t necessarily guaranteed in the long term.
The best place to find safer stocks with low-risk levels is in reliable industries such as food, healthcare and water. Even in times of economic hardship, these types of industries are likely to stay fairly stable, which means that their stocks have good long-term prospects too.