How to Pick Your First Stocks and Funds

By Tim Lemke on 19 December 2017 0 comments

You know you need to start investing, but you’re not sure where to begin. There are a million different investments, so how can anyone determine which to start with?

There is no real wrong way to begin investing, but it helps to start in a familiar place and educate yourself about some of the most common stocks and mutual funds. Follow this advice, and you’ll be well on your way to building a great investment portfolio.

Pick something you know

When just getting started, it helps to have some familiarity with the company you are investing in. So go with a company whose products or services you use every day. Maybe it’s Starbucks, or Walmart. Perhaps it’s Coca-Cola or Pepsi. Do you have an iPhone? Investing in Apple might make sense for you. By starting out with something you know, you’ll have a greater interest in tracking the stock’s movements and paying attention to the company’s operations.

It’s also fun to know that when you buy something from the company, you may be indirectly boosting the stock price. Moreover, if you invest in something well known, it’s likely to be an established company with some track record of success. (See also: How to Buy Your First Stocks or Funds)

Listen to your grandfather

You may tune out when your granddad starts espousing the virtues of shopping at Sears. But there are many companies that were huge 40 years ago that are still big today. Think Coca-Cola, General Motors, General Electric, IBM, or McDonald’s. These are still “blue chip” stocks that have shown consistent, solid shareholder returns over time.

In many cases, these companies don’t even do what they originally did when your grandfather was your age. But that’s OK. If your granddad has invested in a stock for decades and is living comfortably in retirement, it’s probably a solid stock. Following your grandfather’s advice is a great way to familiarize yourself with “large cap” stocks that include some of the world’s biggest companies. (See also: 9 Ways to Tell If a Stock is Worth Buying)

Go after growth

The entire point of investing is to see your money grow, right? So it’s a good idea to familiarize yourself with growth stocks. These are stocks that represent companies poised to see strong earnings growth over time, and are often in fast-growing industries, such as technology. Growth stocks will often have earnings and cash flow that are higher than the average company, and will often have some sort of competitive advantage that gives it an edge in the marketplace.

Famous tech companies including Apple, Netflix, and Alphabet are well-known growth investments. Smaller companies can offer great growth stocks as well, because their size allows for rapid increases in share value. Keep in mind, however, that growth stocks can often carry higher risk than other investments. (See also: What Are Growth Stocks?)

Find a good dividend stock

When learning to invest, it’s important to know that stocks cannot only grow in value, but provide you with some income along the way. Many stocks will pay out a portion of their income to shareholders in what is known as a dividend. Getting your first dividend payment can be very exciting. This is real money that a company gives you each quarter simply for being a shareholder. And many companies will shell out dividends at a rate much higher than interest from the bank.

When researching the best dividend-producing companies, look up how much the company will pay quarterly for each share of stock. That amount relative to the company’s stock price is known as the dividend yield. A good dividend yield, coupled with solid financials and some growth in share price, can make for a great company to invest in.

To find good dividend stocks, research the list of “dividend aristocrats.” These are companies that have managed to increase their dividend payments for 25 years or more. They include Procter & Gamble, Exxon-Mobil, and AT&T.

Invest in “The Market”

If you’re confused about what stocks or funds to purchase, why not invest in everything? Or at least a small piece of everything. There are many mutual funds and exchange-traded funds that are designed to mirror the performance of the broader stock market or major indexes like the S&P 500. You won’t necessarily “beat the market” with these investments, but you’ll see your investments move with the overall stock market, and get exposure to a wide range of companies in various industries.

These investments are often available with very low fees, as well. Good examples of these kinds of investments include the iShares Core S&P Total U.S. Stock Market ETF [NYSE: ITOT], Vanguard Total Market ETC [NYSE: VTI], or T. Rowe Price Equity Index 500 Fund [NYSE: PREIX].

Look for value

One of the most basic pieces of investment advice you’ll receive is to “buy low and sell high.” At its core, this means it’s smart to find investments that are undervalued and have a strong potential to grow and make you a profit over time. These “value” stocks aren’t always easy to find, but they have driven the portfolios of some of the world’s most successful investors, including Warren Buffett.

There are several key things to look for when searching for value stocks. First, it’s important to understand why a stock may have a low price. Often, it’s because the company is not doing well financially. But sometimes, a stock price can fall for reasons that have nothing to do with company performance, in which case it may be poised to rebound.

A company’s price-to-earnings (P/E) ratio is another thing to consider. You can determine this ratio by dividing a stock's earnings by its stock price. A low P/E ratio compared to other stocks may indicate it’s undervalued. (See also: Make Smarter Investments by Mastering This Simple Ratio)

If you are unsure of what value stocks to buy, consider mutual funds that zero in on value stocks. Popular options include the Vanguard U.S. Value Fund [NYSE: VUVLX] and the T. Rowe Price Value Fund [NYSE: TRVLX].

Understand competitive advantage

There are some companies that are just kicking butt. Their edge over their competitors is as vast as the Pacific Ocean, and they are practically synonymous with the industries they are in. Some investors refer to this as a “moat.” A company with a wide “moat” is often viewed as having a large enough competitive advantage to withstand any operating hiccup or economic downturn.

Think Amazon in the e-commerce sector, or Facebook in the area of social media. Alphabet, the parent company of Google, also leaves most of its competitors in the dust, and Walmart dominates the traditional retail sector.

If you’re looking to buy one of your first stocks, consider any company that seems to be just crushing the competition. You may not be able to get shares on the cheap, but you’ll be getting ownership in a company poised to make you money over time.

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How to Pick Your First Stocks and Funds

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