Finding top stocks for new investors is easier when you know what to look for. Discover the types of stocks to invest in and some investments to avoid.

We caution investors to maintain a healthy sense of skepticism at all times. It’s especially crucial for investment newcomers to observe this rule.

Here are some recommendations on the types of stocks for new investors to focus on—and ones to avoid.

Finding stocks for new investors: Focus on investment quality  

The best investment plans or systems use a variation of the value investing approach. That is, they revolve around choosing high-quality investments and diversifying your holdings.

Safer investing also means taking a careful and methodical approach to investing that does not jeopardize your savings or your investment goals. There will always be some inherent risk when investing, so making safer investing decisions lets you minimize that risk.

The safest way in our view for Successful Investors to invest money is to place a lot of importance on investment quality.

We do our own stock market research for our newsletters and investment services, and we apply it from a portfolio manager’s perspective. That’s why we advise sticking to mostly well-established companies; they tend to hold on to more value when things go wrong and recover faster.

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Top stocks for new investors: Zero in on dividend-paying investments

One tip we share often is to invest in companies that have been paying a dividend for 5 or more years. Dividends are typically cash payouts that serve as a way for companies to share the wealth they’ve accumulated. These payouts are drawn from earnings and cash flow and are paid to the shareholders of the company. Typically, these dividends are paid quarterly, although they may be paid annually or even monthly. Canadian citizens who own shares in Canadian stocks that pay dividends will also benefit from a tax break.

Building a diversified portfolio of top stocks for new investors

Always maintain a diversified stock portfolio—and avoid the temptation of trying to pick hot stocks or sectors.

Different investors may be more comfortable holding a larger or smaller number of investments in their portfolios. Here are some tips on diversifying your stock portfolio:

When it comes to a diversified stock portfolio, stocks in the Resources, and Manufacturing & Industry sectors in general expose you to above-average share price volatility.

• Stocks in the Utilities and Canadian Finance sectors entail below-average volatility.
• Consumer stocks fall in the middle, between volatile Resources and Manufacturing companies, and more stable Canadian Finance and Utilities companies.

Most investors should have investments in most, if not all, of these five sectors. The proper proportions for you depend on your temperament and circumstances.

Investments, including stocks for new investors, that should be avoided: Cryptocurrencies & IPOs

I still can’t think of anything that would make me optimistic on bitcoin or any cryptocurrency. The best thing I can say about bitcoin is that it will probably remain volatile, rather than vaporizing like the worst crypto performers.

Please don’t misunderstand. I respect and agree with the many investors who have high expectations for the future of blockchain. (That’s the digital technique that serves as a foundation for bitcoin and other crypto creations.) Some investor/digital gurus think blockchain will change the world. They may be right. However, bitcoin is simply the earliest and most widely known blockchain user.

Bitcoin’s stature as a blockchain poster child has earned it plenty of media and public recognition. But bitcoin’s link with blockchain has no bearing on the future of bitcoin (or any other cryptocurrency) as a substitute for money.

This may surprise respondents to a recent survey about their plans for retirement financing. One quarter of those surveyed, and 30% of millennials, said they were planning to rely on “cryptocurrencies” to finance some of their golden years.

Meanwhile, many recent new stock issues (IPOs) have dropped by 50% or more. Some investors wonder if that’s a sign of a bargain. That’s conceivable. Some broken-down IPOs may turn out to be long-term success stories.

However, a deep drop in price is rarely a reliable indicator of value. In fact, it may mark the start of a much deeper slump.

Remember this time-proven rule from our TSI Journal of Financial Physics: IPOs (Initial Public Offerings or new stock issues) come to market when it’s a good time for the company or insiders to sell. That’s not necessarily a good time for you to buy. In fact, it may be a bad time.

Use our three-part Successful Investor approach for all of your investments, including stocks for new investors

1. Hold mostly high-quality, dividend-paying stocks.
2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
3. Downplay or stay out of stocks in the broker/media limelight.

What were the first types of stocks you targeted as a new investor?

What were some of your most successful stock purchases as a new investor and do you still hold any of those investments?