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New Investors: 3 Types of Stocks You Should Avoid

With thousands of stocks on the Toronto Stock Exchange, it can be overwhelming for new investors to choose their first stocks. To greatly reduce the number of stocks to consider, you can eliminate stocks in these categories.

Volatile stocks

Stocks trading on the public markets are inherently volatile because as Benjamin Graham, the father of value investing, said, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”

You can get a sense of a stock’s volatility by looking at its five- and 10-year price charts. For stocks that are highly volatile, including Teck Resources Ltd. (TSX:TECK.B)(NYSE:TECK), new investors are better off avoiding them altogether.

Looking at Teck Resources’s all-time price chart, you can see that it has big ups and downs. To buy it at the bottom of a cycle and sell it at the top of a cycle takes great skill and perhaps some luck that even experienced experts have trouble with.

caution

Commodity stocks

Miners, such as Teck Resources, are commodity stocks, as are energy stocks, such as Canadian Natural Resources Limited (TSX:CNQ)(NYSE:CNQ) and Spartan Energy Corp. (TSX:SPE).

Similar to Teck Resources, the stocks of Canadian Natural Resources and Spartan have big ups and downs, as their performance is dependent on the underlying commodity prices, which make it hard to buy and sell the stocks at the right times. Between the two companies though, Canadian Natural Resources is a safer investment, given its more diversified portfolio and larger size.

Speculative stocks

When you see a stock with an exponential growth price chart, it’s at least partly due to speculation and hype. Canopy Growth Corp. (TSX:WEED) is an example. It hasn’t even turned a profit yet, but the stock has already taken off. Any bad news can cause the stock to drop like a rock.

That said, if an investor were to invest in marijuana stock, Canopy Growth, a leading company, would be a good bet. Alternatively, investing in a marijuana ETF, such as the Horizons Marijuana Life Sciences IDX ETF (TSX:HMMJ), is another relatively safe option.

Investor takeaway

New investors are likely better off avoiding volatile, commodity, and speculative stocks, because these types of stocks are typically riskier. Additionally, these stocks also require more monitoring than a long-term investing strategy, such as value and dividend investing. New investors should focus on what makes a great investment for them.

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Fool contributor Kay Ng owns shares of Spartan.

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