The stock market is an excellent way to accumulate wealth, but investing in the right places is essential. It can be tricky to separate smart from dangerous choices, but it helps to avoid financial disaster.
Although all investments present some degree of risk, some are much more risky than others. By avoiding the following three types of investments, you can protect your money a lot.
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1. Penny stocks
Penny shares are traded at less than $ 5 per share, and many cost less than $ 1. The types of companies that issue penny stocks are generally small companies and are not normally listed on major stock exchanges.
Penny stocks are risky for a number of reasons. First, their prices can fluctuate a lot. Small businesses tend to be more volatile than large corporations, so it is common for penny stock prices to fluctuate up and down.
In addition, it can be difficult to research penny stocks before investing in them. Smaller companies often do not have long histories, so it is difficult to predict whether a stock will perform well based on the information available. For these reasons, penny stocks are best suited for investors with a high tolerance for risk and uncertainty.
Instead, where to invest: A smart alternative to penny stocks is to buy fractional shares. As the name implies, investing in fractional shares means that you are buying only a small part of a share. This makes investing in expensive stocks much more affordable and allows you to buy shares in large companies for just a few dollars. Since you are investing in large companies with a solid track record, fractional stocks are much safer than low-cost stocks.
2. Risky companies with high dividend yield
Dividend-paying stocks can be a smart investment, but it’s important to make sure you’re looking at the big picture and not just dividend yield.
Just because a company pays a big dividend does not mean it is a smart investment. Some companies may boast a high dividend yield, but the company itself is not growing. Or perhaps the dividend has steadily declined year after year, which is a sign that the company is facing financial difficulties.
If you are hunting for dividends, you may inadvertently invest in a risky company. And no matter how much you are getting paid in dividends, there is no point in putting your savings at risk.
Instead, where to invest: If you want to invest in healthy companies with strong dividend yields, your best bet is to focus on the Dividend Aristocrats. These are companies that have consistently increased their dividends for at least 25 consecutive years. Many of the organizations on this list are familiar names, as Coke and Johnson & Johnsonand have a proven track record of success.
3. IPOs
Initial public offerings (IPOs) occur when companies issue shares to the public for the first time. IPOs tend to create a lot of buzz, but they can be risky because there is a lot of uncertainty around them.
It can be difficult to say how a stock will perform when it is new to the market. Plus, it’s easy to let emotion get the best of you with an IPO. Some companies are overestimated before their IPO, so their performance is underperforming. Case in point: when Lyft went public in early 2019, it gained a substantial amount of hype. Immediately after the IPO, however, the stock price started to plummet, and ended up falling about 43% at the end of the year.
Instead, where to invest: Instead of investing in new stocks as soon as they hit the market, target companies that have been trading in public markets for at least a year. While these companies can still be risky, you will have a better idea of how stocks are performing. This will also give you more time to investigate a company’s finances and decide whether it is a solid long-term investment.
Choosing the right investments can be challenging, so doing due diligence is crucial. By avoiding some of the riskier types of investments and making more stable choices, you can limit your risk while maximizing your gains.