A Guide to Investing in Stocks in 2024

Starting with stock investing can feel overwhelming due to the amount of information you need to learn. While buying individual stocks requires effort, there are strategies to help you avoid potential losses and focus on stocks with strong growth potential.

Here are some top stock picks for beginners and key considerations to keep in mind as you begin your investment journey.

Best stocks for beginners: What to look for

As you begin exploring the stock market, consider these categories of stocks that are often recommended for new investors. While not every stock in these categories is a guaranteed winner, they offer a solid foundation for finding investments with potential for attractive returns. Investing in individual stocks requires research and patience—it’s more than just picking a few names and hoping for the best.

Blue chip stocks

Blue chip stocks represent companies with strong financials and a leading position in their industry. These companies are typically well-established and have a reputation for stability and reliability. For new investors, focusing on blue chip stocks can be a smart move, as these are often among the market’s top performers even after achieving widespread recognition. For instance, Amazon was a prominent player a decade ago and has continued to deliver impressive returns. Blue chip stocks include those in the Dow Jones Industrial Average and major components of the S&P 500 and Nasdaq Composite.

Companies with growing sales and profits

Investing in companies that consistently grow their sales and profits can be a profitable strategy. Stocks of companies with strong growth trajectories often see higher prices as their business expands. Look for companies that have demonstrated significant growth over the past five to ten years, with annual increases of 8% or more in sales and profits. Apple, for example, has been a standout growth stock for decades, despite occasional slowdowns. While past performance is not a guarantee of future results, it provides a solid starting point for research.

Firms sporting strong balance sheets

Avoiding companies with excessive debt is key to reducing investment risk. Firms with strong balance sheets, characterized by substantial cash reserves and manageable debt levels, are less likely to face bankruptcy. These companies are better positioned to weather economic downturns and capitalize on opportunities. For example, Berkshire Hathaway is known for its robust cash reserves and prudent investment strategies. In contrast, companies burdened with high levels of debt may struggle during tough times, potentially jeopardizing their financial stability.

Dividend stocks

Dividend stocks, or companies that regularly pay dividends to shareholders, can be a great choice for new investors. These stocks are typically backed by solid businesses capable of sustaining dividend payments. The best dividend stocks not only maintain consistent payouts but also increase their dividends over time. A notable group within this category is the Dividend Aristocrats, companies that have increased their dividends for 25 consecutive years or more. Dividends can be a significant part of an investor’s return, making dividend-paying stocks an appealing option for steady income.

By focusing on these types of stocks, you can build a strong foundation for your investment portfolio.

Stocks to watch out for as a new investor

Successful investing involves more than just picking top-performing stocks. In fact, avoiding certain types of stocks can be just as crucial in avoiding investments with low or no chance of success. As Warren Buffett wisely puts it: “The stock market is a no-called-strike game. You don’t have to swing at everything — you can wait for your pitch.”

Here are some types of stocks that new investors should approach with caution. While they might eventually prove worthwhile, they carry additional risks that are often better suited for experienced investors:

Small-Cap Stocks
Small-cap stocks represent smaller companies with a total market value of up to around $2 billion. Although many successful companies started as small caps and grew into larger entities, these stocks are inherently riskier due to their less established business models and limited financial resources. Instead of investing directly in small caps, consider small-cap ETFs to gain exposure with reduced risk.

OTC Stocks
Over-the-counter (OTC) stocks are traded on less regulated exchanges and often have lower disclosure requirements compared to major exchanges like the NYSE or Nasdaq. While some reputable foreign companies trade OTC, many small American companies with questionable standings also fall into this category. Finding worthwhile investments here requires advanced skills, and new investors might be better off avoiding OTC stocks.

Penny Stocks
Penny stocks, typically trading for less than $5 per share, are generally best avoided. Many penny stocks trade OTC, and they often lack comprehensive financial disclosures. Due to their low prices, they can be prone to manipulation and high volatility. While there may be hidden opportunities, new investors should be cautious and consider staying away from this segment.

Stocks Promoted on Message Boards or Tipsheets
Be wary of stocks promoted through message boards or unsolicited tipsheets. These promotions often involve “pump-and-dump” schemes where the goal is to artificially inflate a stock’s price so that scammers can sell off their shares at a profit. Investing based on these tips can lead to significant losses.

Meme Stocks
Meme stocks gained popularity in 2021 when individual investors drove up the prices of heavily shorted stocks to create a “squeeze.” Although these stocks can experience dramatic price increases in the short term, their movements are often driven by social media trends rather than the underlying fundamentals of the companies, making them highly volatile and risky.

Overall, these types of stocks generally pose higher risks compared to investing in established companies. New investors should carefully evaluate their risk tolerance and consider focusing on more stable investment options.

Consider stock index funds

Investing in individual stocks can be exciting, but for new investors, starting with a high-quality stock index fund can be both effective and less complicated. Index funds, such as those tracking the Standard & Poor’s 500 (S&P 500), often outperform most individual stock picks, including those of professional investors, over time. They provide a solid foundation for beginners embarking on their investing journey.

The S&P 500 index includes hundreds of leading American companies—strong, blue-chip firms that have demonstrated resilience and growth over the years. Historically, the S&P 500 has delivered around a 10% annual return over the long term. The companies within this index operate in robust industries, possess substantial financial resources, and frequently offer attractive, growing dividends.

One of the advantages of investing in an S&P 500 index fund is that it eliminates the need for extensive individual stock analysis. This fund offers diversification and is ideal for buy-and-hold investors who prefer a straightforward approach without the need to constantly manage their investments.

Even if you’re interested in individual stocks, starting with an S&P 500 index fund can serve as an excellent core investment. As you gain more experience and confidence, you can diversify further by adding individual stocks or other types of investments.

In Conclusion

For beginners, the best stocks are typically those from well-known companies with established businesses and strong financial stability. By focusing on these proven companies and steering clear of riskier market segments, new investors are more likely to achieve success in their early investing efforts.