Becoming a skilled investor can lead to life-changing wealth. Even so, it’s important to start slowly. In my opinion, the best stocks to buy for beginners are those that are large, easy to understand and defensive. Let’s briefly look at each of these qualities along with a few examples.
If I were new to investing, I’d stick to buying shares in big companies. This might mean only picking stocks from the FTSE 100 index — the Premier League of the UK market.
One benefit of larger company stocks is that they’re highly liquid. In other words, there’s usually a buyer for every seller. In practice, this means I should always be able to sell if I want to (although doing so in a panic should be avoided). Contrast this with smaller companies where it can sometimes be a struggle to find a buyer at a good price. Thanks to their clout and financial stability, larger companies can also ride out inevitable periods of poor trading.
Having said this, the size of a business matters little if I don’t understand it. This brings me to my second point.
Know the company
As an investor, I must know how a business makes its money. Otherwise it becomes harder to predict whether it can do well in the future. Being a customer helps.
Two great examples of this are drinks giant Diageo and consumer goods firm Unilever. I know the former owns some of the most recognisable brands consumed in my local pub, such as Smirnoff and Guinness. The latter’s products are in most kitchens and bathrooms. US tech stocks like Amazon and Apple also fit the bill and are potentially worthy of inclusion in a new investor’s portfolio in time.
There’s nothing especially complicated going on here. If I’m struggling to appreciate the basic business plan, it’s not for me.
Defensive companies sell products or services that are in fairly constant demand. This predictability makes them the best stocks to buy for beginners, in my view.
For me, this would include supermarket giant Tesco. After all, everyone needs to eat. Moreover, a quick web search confirms that Tesco is the clear market leader.
In fact, all the companies already mentioned strike me as pretty defensive. I know I’ll continue buying Marmite (Unilever), most probably from Tesco. I’ll also continue to order stuff through Amazon and make calls using my iPhone.
Put another way, defensive companies are not the sort I might read about on Reddit. These ‘meme stocks’ just don’t have the solid fundamentals to back up their big price gains, making them very volatile.
For me, the best stocks to buy for beginners are those that get on with things without much fanfare.
But do I actually need to pick stocks?
Some people simply don’t have the time to fully research businesses, so stock-picking isn’t essential. On top of this, investing in even the biggest and best-known stocks is never risk-free. As the 2020 market meltdown showed, most share prices fall when negative global events occur.
If I’m put off by either of the above, allowing a professional (or computer) to invest on my behalf may be more appropriate. Accordingly, some beginners might be better suited owning a bunch of active and passive funds rather than single company stocks.
Paul Summers has no position in any of the shares mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon and Apple. The Motley Fool UK has recommended Diageo, Tesco, and Unilever and has recommended the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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