How to Invest in Safe Stocks

By W D Adkins

  • Overview

    If your investment goals focus on income and equity maintenance rather than equity growth, or if the economic climate is uncertain, you probably want to invest in safe stocks. Unlike investments like bank CDs and savings accounts, stocks are not insured, so none are completely without risk. However, you can minimize risk with a clear investment plan and by doing the research to find low-risk stocks. The key is to know what types of companies and stocks carry the least risk and then evaluate the "fundamentals" of individual companies.
    • Step 1

      Monitor economic news in financial publications like the "Wall Street Journal" and industry newsletters. You will be able to get leads on potential investments from independent analysts as well as news about how particular industries are doing.
    • Step 2

      Pay particular attention to industries that have a history of good earnings and stability. A good example is the utilities industry. Stocks in power companies and other regulated utilities historically have relatively stable stock prices with moderate growth and high dividends.

    • Step 3

      Consider the preferred stock issues of major corporations. Preferred stock carries less risk because it takes precedence over common stock in the event a company goes out of business. Typically, dividends on preferred stock are higher and must be paid first ahead of common stock. A preferred stock issue does not usually grow in value as much as common stock. On the other hand, if the company's fortunes suffer a reverse, the preferred stock shares hold their value better.
    • Step 4

      Seek out defensive stocks and avoid cyclical ones. Cyclical stocks are especially vulnerable to economic conditions, like airlines and automakers. While these may be good investments they are prone to a "boom and bust" cycle as companies will lose disproportionate amounts of business in economic downturns. Defensive stocks are just the opposite. Companies that produce goods and services people must have tend to do better in a bad economy. Food producers, oil and coal are examples of industries that feature defensive stocks.
    • Step 5

      Do your homework to make sure you invest in safe stocks. A company may fit the general profile of a safe stock, but much depends on the characteristics of the individual firm. Read the company's annual report (available on most major corporation websites under "Investor Relations"). Examine the company's performance over the past 3 to 5 years. Pay particular attention to earnings and stock prices. Read the company's balance sheet and look for indications the company is financially stable and positioned to continue good performance.
    • Skill: Moderately Challenging
    • Ingredients:
    • Brokerage account
    • Tip: Avoid "penny stocks" (low-priced issues traded over-the-counter). These are small and frequently new companies. Some will prove to be winners, but they carry more risk than established firms.
    • Tip: Stock trading strategies such as buying stocks on margin, short selling stock or investing in stock options are useful tools, but they carry high risks and aren't compatible with an investment plan that emphasizes equity protection.

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