Best Cheap Stocks to Buy Right Now

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Top Stocks to Buy Now: Making Informed Investment Choices

When it comes to investing in the stock market, most people immediately think of stocks, rather than bonds, futures, options, exchange-traded funds, and so on. Perhaps the reason is that stocks are a straightforward instrument (a stake in a business—what could be simpler?) that offers the potential for high returns. On the other hand, stocks are also high-risk instruments, as they can experience price drops of 30-40% or more during periods of crisis. So, despite their apparent simplicity, choosing stocks requires a thoughtful approach. In this article, we will learn how to earn money by buying stocks for long-term prospects from reliable companies.

As mentioned before, stocks represent a stake in a business. And businesses are inherently unstable: they can go bankrupt, suffer during periods of crisis, but also experience significant growth during favorable times. Considering that the economy grows in the long run, albeit interrupted by periodic crises, investing in stocks is perhaps the only way to outpace inflation over a 3-5 year investment horizon. After all, bonds, if we consider reliable companies, only provide returns at the level of inflation. Gold only grows in periods of instability, and those are fewer than periods of growth. Real estate, yes, it appreciates in value and can generate rental income, but during periods of economic growth, stocks still outperform it, and the entry threshold into stocks is lower.

Thus, without stocks, it is simply impossible to outpace inflation with medium- and long-term investments. Even if you are not ready for risk, nobody says you should invest 100% of your savings in stocks. You can allocate at least 10-20% of your savings to stocks, and that's better than nothing.

How can you determine which stocks are suitable for you? Stocks can be common (with voting rights, no guaranteed dividends, and payments to holders only occur after payments to preferred stockholders in case of company liquidation) and preferred (no voting rights, but guarantee at least some dividend payments).

If your main goal is to live off passive income, it makes more sense to choose "dividend aristocrats"—stocks of large reliable companies that pay stable dividends year after year, and these are mainly preferred stocks. In the United States, "dividend aristocrats" are stocks that have increased their dividends for the past 25 years. When choosing them, it is important to assess dividend yield first and foremost: it should be higher than inflation. It will also be necessary to assess the growth potential of the stock itself so that you don't end up buying a stock, spending all the dividends, and it doesn't appreciate in price or, worse, falls year after year.

Where can you find "dividend aristocrats"? In the case of American stocks, it's simple – there is a dedicated index for "dividend aristocrats" called the S&P Dividend Aristocrats, which includes all the stocks with consistently growing dividends. The index composition can be found in the description of the ProShares S&P 500® Dividend Aristocrats ETF.

For European "dividend aristocrats," there is also an index – the S&P Euro High Yield Dividend Aristocrats Index, which includes stocks with the highest and most stable dividends. The index composition can be found in the description of the SPDR® S&P Euro Dividend Aristocrats UCITS ETF (EUR).

If your primary goal is significant capital growth, then the main focus in selecting stocks should be on assessing the company's growth potential, and dividends may not be considered at all.

How can you assess the growth potential and reliability of a company? If it's not a short-term speculation but a long-term purchase of stocks for dividends or with the prospect of substantial growth, it is necessary to ensure that the company is reliable and has potential. Financial ratios can help with this:

Current liquidity (current assets/current liabilities). It should be above 1. This ratio shows whether the company has enough money (or assets that can be quickly sold) to repay short-term debt within a year.

Return on assets (profit/assets) and return on equity (profit/equity). It indicates the profitability of the business as a whole (return on assets) and the profitability of the owners' equity in the business (return on equity). EBITDA (earnings before interest, taxes, depreciation, and amortization) is often used as the profit measure. The return on assets should be higher than inflation for the business to be considered promising. Inflation should be taken into account based on the relevant country: Canadian companies should consider Canadian inflation, American companies should consider American inflation, and so on.

Dividend payout ratio (dividends/EBITDA). It should not exceed 0.7, otherwise, it would mean that the company is distributing all its profits to shareholders without leaving anything for development, which could negatively affect the long-term potential of the business.

P/E ratio (market capitalization/net profit). It shows how adequately the company is valued relative to the money it earns. Typically, if the P/E ratio is below 15, the stock is considered undervalued, and if it is above 15, it is considered overvalued. However, this is a general guideline, and it is important to look at the average P/E ratio for the industry to understand where the company you are examining stands relative to other companies in the same industry.

Where to find all these ratios? You can visit the website of the company you are interested in and look for the "Investors" or "Shareholders" section, where you can download financial reports (balance sheet and income statement) and calculate at least the first three ratios yourself. Alternatively, you can use websites like www.investing.com, www.tradingview.com, www.finviz.com, where the ratios are already calculated.

Where to Buy Stocks?

You can earn money on stocks that have been traded for a long time by receiving dividends or through changes in their price, as well as through initial public offerings (IPOs). When a company goes public and is seen as promising by potential investors, the stock price can significantly increase in the first few weeks of trading. You can profit from this by placing an order through a broker to participate in a particular IPO and then selling the stock when its price goes up.

Of course, investments in IPOs are much riskier than investing in stocks of long-established companies with a history and financial reports. For some companies going public, there may be no reasonable financial results at all, so the focus during an IPO is primarily on whether investors believe in the company. You can find a list of upcoming and past IPOs here.

What if you don't have the time or money to choose stocks and monitor them yourself? Or if you don't have a large amount of savings yet to create a diversified portfolio of multiple stocks? That's not a reason to give up on stocks altogether. You just need to find the right option for you.

Equity investment funds are ideal for both minimal and large amounts of capital, as they allow you to earn returns at the market level. Investment funds can be exchange-traded (traded on the stock exchange) or regular funds available through asset management companies. In terms of fees, entry thresholds, and liquidity, exchange-traded funds are generally more attractive.

Structured products tied to stocks are pre-designed strategies created by financial companies that are linked to specific stocks. They provide returns if the stocks appreciate. Usually, they involve some form of protection so that you don't incur losses even if the stocks decline, within certain limits.

Robo-advising is a special program that sends recommendations to your application, suggesting which stocks to buy and sell. You can agree, disagree, or modify these suggestions. It's a great option for those who want to try trading while having reliable guidance and who don't have the necessary capital or the desire to pay extra for discretionary management.

Copy trading is an excellent alternative to discretionary management. You choose a trader whose strategy you find effective, connect it to your brokerage account, and all the trades of the strategy you like are automatically duplicated in your account.

Discretionary management is suitable for large capital and individual investor requests who are not ready to choose stocks, monitor the market, etc.

Personal brokerage service is a special tariff offered by a broker/bank where you regularly communicate with an analyst who provides trading recommendations and answers your questions.

In other words, stocks are an essential part of any medium- to long-term portfolio that you want to protect against inflation. The perceived complexity of selecting individual stocks can easily be overcome by choosing the right form of stock investment that suits you. For beginners, exchange-traded funds are an ideal option. With them, you can become a shareholder even with less than $100.

Why Is Investing in Stocks Considered Risky?

Even among experienced financiers, it is considered an axiom that "buying stocks is an investment accompanied by high risks." However, under certain conditions, owning stocks becomes one of the most reliable ways to preserve wealth and one of the most effective ways to invest money.

There are three main groups of reasons for the prevalence of this opinion.

The first group of reasons: historical stereotypes

All financial catastrophes of the last 35 years were in some way related to securities. However, if we delve into it, none of these events were directly linked to the stock market. For example, in 2008, the crisis happened because of mortgage-backed securities in the United States. But what do stocks have to do with it? Of course, during the 2008 crisis, the stock market suffered significantly, but it continued to function and provided fantastic opportunities for investors.

The second group of reasons: low level of financial literacy

Most people rely on primitive methods such as buying foreign currency and bank deposits to preserve their savings. Many do not understand the difference between stocks and bonds and consider the stock market as a roulette wheel (a casino). There is a stereotype that investing in stocks requires special knowledge and a long learning process. This is not true. One simple way to build a portfolio is to buy 10-15 of the most liquid (popular) stocks in equal proportions and rebalance it quarterly: sell some of the stocks that have increased in proportion and buy those that have decreased in the portfolio (portfolio balancing). However, let's not underestimate the importance of professionalism: special knowledge and tremendous effort are needed to outperform the average market indicators when managing a portfolio.

The third group: professional bias

At first glance, one might wonder why financiers consider stocks a risky investment if they are considered experts in this field. But equating a financier with an investor is not possible. A significant portion of the financial community consists of current or former banking employees. They are accustomed to lending and borrowing money for short periods: a month, a quarter, a year. From this perspective, stocks are indeed a risky investment.

Conditions under Which Stocks Cease to be a Risky Investment

Now that we have discussed the reasons for this attitude towards stocks, it is time to name three simple conditions under which investing in stocks becomes one of the most reliable ways to preserve wealth and one of the most effective ways to invest money.

The first condition: dispelling the main stereotype and misconception

The stock market is not a game. It is not roulette. The stock market is a convenient and technologically advanced way to invest money in businesses. The majority of active participants in the stock market are adventurers who come to the market with the desire to play and speculate. Furthermore, there is a common belief that you can only make money on securities by playing the game, which discourages people who do not consider themselves players, speculators, or adventurers. In the United States, 150 million people (out of 250 million adults) are involved in the investment process, which is about 60%. Think about it, can so many people be adventurers?

2nd condition: Diversification – an investor's best friend

Millions of people dream of starting their own business and working for themselves. Everyone intuitively understands that business is profitable. However, only 10% of new companies remain in operation after 5 years. By investing money in your own business, you are putting all your eggs in one basket.

In the United States, large enterprises are owned by the population by 80-90%. The key is not to bet on a single company. Don't be disappointed if one company grows more than others, while another may even decline. Balance your portfolio and resist the temptation to always pick the best and place all your bets on it.

3rd condition: Regularity of investing

This is perhaps the most challenging condition to fulfill. It may seem easy to invest 10% of your income every month. 10% is not a significant amount for a family budget. However, every month unexpected expenses arise that need to be urgently addressed. You will have to fight against the temptation to "skip this month."

But even if you find the strength to resist this temptation, another threat emerges. When the stock prices decrease, especially during crises, fear for your money arises. The desire to sell everything and withdraw emerges. Overcoming these emotions is very difficult. However, if you find the strength to conquer fear and refrain from selling stocks, your wealth will not decrease by a single share. Investing regularly during these periods can work wonders for your prosperity.

Don't try to time the market and buy at its lowest points. Later, you will find yourself realizing that your most successful stock purchase was not associated with the market bottom. The legendary investor Barton Biggs expressed this ironically, saying, "Now is always the most inappropriate moment to start investing."

When people save money, they usually have a goal - to buy a refrigerator, furniture, a car, or go on vacation. They save up and make the purchase, and then start saving again. Now it has become fashionable to buy on credit. We are raised in a culture of money and consumption. It seems like everything revolves around money. But that's not true. Consumption doesn't make a person richer. It makes sense to buy a car when its cost is no more than 1/10 of your wealth, and the same can be said for furniture, appliances, and vacations.

People often ask: What is the best investment horizon for stocks? One year, two years, five years? Investments in stocks should be made throughout your entire life, but these investments will sustain you throughout your life.

Wealth is not built from money but from assets. In our view, the best assets are real estate and efficient businesses. Real estate is straightforward - it's an apartment, a house. You don't buy a house for a couple of years. When people create their own businesses, they also invest their efforts and money into them for more than a year or two. However, to create and run a successful business, abilities are required. If you lack them, you can simply buy stocks and hold them for your entire life, occasionally rebalancing your portfolio.

This idea can also be viewed from another perspective - the concept of human and financial capital.

Conclusions

Do not be captive to false stereotypes about the stock market and investing.

Do not believe that special knowledge or a large initial capital is necessary for investing in stocks. You can start investing with $10.

Adhere to the rule of diversification and make regular investments.

Avoid speculation – you will lose.

Buy stocks and hold them, and they will reward you abundantly. Moreover, stocks are one of the few assets that can truly protect against inflation.