3 investments that could drain your money and where to invest instead

The stock market is a great way to build wealth, but investing in the right places is crucial. It can be difficult to separate the smart choices from the dangerous ones, but it can help you avoid financial disaster.

Although all investments carry some degree of risk, some are much riskier than others. By avoiding the following three types of investments, you can protect your money to a great extent.

Image source: Getty Images.

1. Penny stocks

Penny stocks trade at under $5 per share, and many are priced under $1. The types of companies that issue penny stocks are usually small businesses and are not usually listed on major stock exchanges.

Penny stocks are risky for a variety of reasons. First, their prices can fluctuate wildly. Small companies tend to be more volatile than larger companies, so it’s common for penny stock prices to fluctuate up and down.

Additionally, it can be difficult to research penny stocks before investing in them. Smaller companies often don’t have a long track record, so it’s hard to predict whether a stock will do well based on the information available. For these reasons, penny stocks are best suited for investors with a high tolerance for risk and uncertainty.

Where to invest instead: A smart alternative to penny stocks is to buy fractional shares. As the name suggests, investing in fractional shares means that you only buy a small portion of a share. This makes it much more affordable to invest in expensive stocks and allows you to buy shares of big companies for just a few dollars. Because you are investing in large companies with strong track records, fractional shares are much safer than penny stocks.

2. Risky companies with high dividend yields

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 the dividend yield.

Just because a company pays a large dividend doesn’t mean it’s a wise investment. Some companies may boast of a high dividend yield, but the company itself does not grow. Or perhaps the dividend has steadily declined year over year, indicating that the company is in financial trouble.

If you find yourself chasing after dividends, you could end up inadvertently investing in a risky business. And no matter how much you receive in dividends, it’s not worth putting your savings at risk.

Where to invest instead: If you’re looking to invest in healthy companies with high dividend yields, your best bet is to focus on 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 household names, such as Coca Cola and Johnson & Johnsonand have proven themselves.

3. IPOs

Initial public offerings (IPOs) are when companies first issue shares to the public. IPOs often create a lot of buzz, but they can be risky because there is so much uncertainty surrounding them.

It can be difficult to predict how a stock will perform when it’s brand new to the market. Plus, it’s easy to let emotion get the better of you with an IPO. Some companies are hyped before they go public and then they underperform. Example: When Lyft went public in early 2019, it gained substantial hype. Immediately after its IPO, however, its stock price began to fall and it ended up falling about 43% by the end of the year.

Where to invest instead: Rather than jumping on new stocks as soon as they hit the market, aim for companies that have been trading on public markets for at least a year. While these companies may still be risky, you’ll get a better idea of ​​how the stock is performing. It will also give you more time to investigate a business’s finances to decide if it is a solid long-term investment.

Choosing the right investments can be difficult, so doing your 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.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

About Andrew Miller

Check Also

Verizon to buy prepaid phone vendor Tracfone for up to $6.9 billion

Estimated reading time: 1-2 minutes This news archive is available for your personal, non-commercial use …