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How to Pick Your First 5 Stocks

By Maurie Backman - Mar 31, 2021 at 6:02AM

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New to investing? Here's how to assemble a portfolio that'll help you build wealth.

Buying stocks for the first time can be overwhelming. But the sooner you get comfortable with the idea, the easier it'll be to build a portfolio that serves you well for the long haul. Here's a quick guide to choosing your first five companies to invest in.

1. Land on a strategy

The stocks you buy should align with an overall strategy you set for yourself. Your strategy might be based on:

  • Growth stocks -- companies that are likely to outperform the competition through the years.
  • Value stocks -- companies whose stocks are underpriced given their prospects.

Of course, you don't need to choose growth potential over current value -- you can assemble a portfolio that's a mix of both. Furthermore, your risk tolerance should play a role in the stocks you buy. Some growth stocks can be volatile, and if you buy companies whose share prices are already high, there's a chance they could drop.

Man at laptop with numbers displayed on screen

Image source: Getty Images.

2. Look at different market segments

Having a diverse portfolio can help you grow wealth over time. It can also protect you from extreme losses during stock market crashes or periods of extended volatility.

As you choose your first batch of stocks, aim to invest in different market segments or industries. Or, to put it another way, instead of buying five tech stocks as your first batch, consider one or two tech stocks, one auto stock, one energy stock, and one bank stock.

3. Consider companies that pay dividends

Dividends are wonderful things for a couple of reasons:

  • They serve as a steady stream of income that you can either use as you please or reinvest.
  • They offer you some protection during stock market crashes -- if your portfolio loses value, your incoming dividend payments could help offset those losses.

Many companies pay dividends, but one thing you should know is that companies aren't required to do so. It could therefore pay to focus your search on Dividend Aristocrats -- companies with a long history of not only paying dividends, but also increasing their dividends year over year.

Keep in mind that your dividend stocks should tie into your general investing strategy and tolerance for risk. Also, be sure to choose a diverse mix of dividend stocks; don't just load up on five healthcare stocks with a strong dividend history.

The upside of buying individual stocks

Some people who are new to investing might favor index funds, which effectively let you buy a bucket of stocks with a single purchase. But the benefit of hand-picking stocks is that you get more of a say in how you're invested.

When you buy index funds, you don't choose the companies you put your money into. And index funds won't help you beat the market, since they're designed to simply match the performance of the indexes they're tied to.

Buying individual stocks, on the other hand, gives you a chance to snag ultra-high returns that outpace the broad market in a meaningful way. And that could, in turn, be your ticket to growing a lot of wealth.

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