Investing in stocks can be a great way to grow wealth over time. It can also allow you to gain more income through dividends if you invest enough. Learn how to get started, how to choose, as well as the risks you should consider.
Blue-Chip Stocks
Stocks in companies that are longtime market standbys are called “blue-chip stocks.” Even if they are not highlighted in the press, they are generally old and sturdy; they tend to be able to weather changing market conditions and economic storms. Blue chips are great for newer investors; they tend to move with the market predictably. They also carry less risk than most other stocks. The S&P 500 tracks top companies in key industries in the large-cap segment of the market; many of these are blue-chip stocks. These companies have flourished for years; If you’re new to investing, they are reliable choices. One great example of a blue-chip stock is Walmart (WMT). The chain store has a history going back to 1962. It also has a huge market cap of more than $400 billion and relative stability compared to the market as a whole. In 2020, with more than $500 billion in annual revenue, Walmart held the top spot on the Fortune 500 list.
Value Stocks
Value investing is the idea that you can find undervalued stocks that look like attractive investments. You can do that by using financial analysis. When you analyze a business and its stock performance, you can find and buy securities that are priced well below their true values. Value investing is the mantra of many famous investors, such as Warren Buffett. The S&P Global Index measures value stocks by using three factors: the ratios of book value, earnings, and sales to price. Potential value stocks include JP Morgan Chase (JPM), Bank of America (BAC), and the Walt Disney Company (DIS). Finding undervalued stocks is not always easy. One of the most useful metrics to look at is book value per share, which shows assets compared to the current share price. Other popular ratios include:
Price-to-earnings ratio (P/E ratio)Price-to-book ratio (P/B ratio, also known as “price-equity ratio”)Debt-to-equity ratioUnlevered free cash flow
Dividend Stocks
Some people put their money into markets to see stock prices rise. Others care more about earning cash flow from their investments. If you want your stocks to pay you, dividends are the name of the game. Dividends are a portion of a company’s revenue paid to shareholders. Corporations often pay them quarterly. Dividends can be paid in cash or reinvested in more stock. When researching dividend stocks, look for a trend of steady dividends (or, better yet, dividend growth) over time. That usually signals a financially healthy company with good long-term prospects. “Dividend Aristocrats” is a term coined by S&P Global Indexes. Those are firms that have increased their dividends every year for the last 25 consecutive years. They include Albemarle (ALB), Nucor (NUE), and Chubb Limited (CB). Keep an eye out for any dividend yields that appear to be too high. Any stock paying a very high dividend should be looked at with a dose of skepticism. It could mean that investors expect the share price to drop or an upcoming dividend reduction. To find current dividend yields, you can look at your brokerage account or free investment data websites. You can also look at a firm’s investor relations website, annual report, or required public filings for dividend information.
Growth Stocks
Growth stocks have earnings that grow at a faster rate than the market average. In most cases, a start-up company in an area of interest is likely to be a growth stock. The technology sector is one example. Smaller companies and newer companies are riskier for investors. But some offer strong opportunities for growth. Growth stocks can come out of any industry. High-tech companies in Silicon Valley have shown great growth prospects throughout the 21st century. These stocks can be companies of any size. Larger growth stocks are often more stable and less risky, but they provide lower returns than smaller, newer businesses that have lots of room to grow.
Pros and Cons of Buying Stocks
Pros Explained
Potential for growth to exceed inflation: Inflation is the rate at which the dollar loses value. It’s a normal part of any economy. Ideally, your stocks earn a higher return than inflation. Possible revenue from dividends: Some stocks pay dividends, or cash payments, to shareholders. They are usually fairly small on a per-share basis, but if you have a large portfolio, you may be able to earn a reliable income from your stocks. Option to pivot when market trends change: You can sell a stock with a few clicks on your computer or taps on your phone; this is far more simple than with other types of investments. If you want to change your portfolio, you have the option to do so at any time. Satisfaction of finding winning stocks: If you invest in single stocks, it feels great when you hit a winner. You may see your account balance skyrocket.
Cons Explained
Potential losses from unpredictable markets: There are no guarantees in the stock market. If you pick a bad company or invest at a bad time, it’s a risk. You could lose money. Unpredictable dividend payments: Most companies that pay dividends aim to follow a predictable schedule, but there’s always a chance that revenues and profits will drop. On occasion, dividends may stop completely. Stress from underperforming stocks: It’s normal for your investments in your portfolio to fluctuate, but for many, this concept is stressful; it can be challenging to get used to. Difficulties identifying winning stocks: Actively managed investment funds employ highly skilled and financially savvy managers. They regularly work to beat the stock market; however, most of the time, even they can’t do it.
Beware of Risky Investments
To avoid major losses, ensure that you invest in a diverse portfolio of stocks. Choose from multiple industries and geographic locations. Before you buy any stock, review its recent performance, analyst opinions, competitors, and future landscape. It could be a buy if you think it is a solid business with good management and great prospects. If you have any concerns or reservations, hold off on clicking the Buy button. Then, wait for a safer investment to come along.
