When it comes to building wealth, investing is how you do it. This is how you put your money to work for you and essentially grow your money. From mistakes to wins, people talk about investing all day long. They are also quick to share their investing approach and why they think it's the best one. With everyone touting the "best investment approach," how do you determine what's best for you? Should it include buying individual stocks?
Well, let's talk about that! I often get asked whether or not it’s a good idea to invest in individual stocks. If you are reading this, you've also likely asked yourself, "Should I buy individual stocks?".
In this article, I will share my opinion on what I think about stock investing and who it’s best for, along with the pros and cons of buying single stocks.
What is a stock?
As a quick refresher and to give you context, a stock is essentially ownership of a company. Stocks are also known as shares, and the holder of those shares is called a shareholder.
You can invest in individual companies by buying individual stocks. You can also purchase stocks by investing in vehicles like index funds or ETFs etc, that aggregate the stocks of several different companies.
When is investing in individual stocks a good idea?
Investing in individual stocks can be a great addition to your portfolio. However, whether or not you should invest in them depends on how you currently invest. I like to look at it based on the current structure of your investment portfolio and your investing experience. Let's discuss.
Buying individual stocks as a new investor
As a new investor, you don’t want to put all your eggs in one basket when it comes to buying stocks. Based on this, it’s a good idea to focus on having broad diversification in your portfolio. This is where you essentially mitigate your risk by spreading your money across a variety of different investments.
This could include different asset types (e.g. stocks, bonds, real estate, etc) and different industries (e.g. Technology, healthcare, consumer goods, etc).
ETFs and index funds are a better option than individual stocks because they offer broader diversification. As a result, they, in turn, help to minimize risk.
It’s also a good idea for new buyers to focus on learning how investing works. Building knowledge around investing will make you an informed and confident investor. Especially when making investment decisions, including investing in individual stocks and when is the best time for you to invest.
Buying individual stocks as an experienced investor
If you are an experienced investor, it's likely that you already have broad diversification. Based on this, it could make sense for you to buy single stocks. However, you still need to do your research to make sure that the individual stock investment makes sense for your portfolio and your long-term investing goals.
This means doing specific research to assess company risk, review financials, investigate company leadership track records, determine the company's future potential for growth, and more.
Pros and cons of buying individual stocks
There is a lot to learn about the stock market exchange and how to invest wisely. Many have a fear of the stock market because of its volatility. Some may wonder if buying individual stocks is a good financial move for them.
Of course, you should never let market volatility stand in your way of investing. So here are the pros and cons of investing in individual stocks to help you decide if it's for you!
Pros of buying individual stocks
There are a number of benefits you get when you buy individual stocks. So let's start with the benefits first!
You are in control of what you buy
When you buy single stocks, you decide what stock you buy and how much you spend on each stock. This is different when you invest in funds. When you invest in a fund, you can only decide how much you invest.
You have no say as to how your money is divided up across the different companies the fund invests in or when it's done. With individual stocks, you get to make these decisions.
You don't pay management fees
By investing in individual stocks, you don't have to worry about recurring management fees or expense ratios.
You may pay a trading fee to buy the individual stock depending on your brokerage. However, that's about it when it comes to fees until it comes time to sell.
Cons of buying individual stocks
We always say there are cons to everything. Here are a few things to keep in mind if you are thinking of purchasing a single stock.
Diversification is limited
When you invest in an individual stock, all your money is in that one stock. You may be invested in multiple individual stocks, but this is limited to how much money you have to invest in each company. And lower diversification and higher risk.
As a result, investing in individual stocks doesn't compare to the fact that index funds and ETFs, for example, invest in hundreds and even thousands of stocks aggregated into a single fund. When you buy a fund, your money is spread across all of these stocks.
You need to dedicate a lot of time
Since you have limited diversification when you are solely invested in individual funds, it's important to spend time tracking the performance of the companies you are invested in.
You need to be aware of any big issues that could impact the value of your investments. If a company fails, you can lose your entire investment.
With funds, less time is required since your money is so widely invested. Big impacts on one stock in a fund can be absorbed by the rest of the fund without a lot of friction and without a total loss of your investment.
Focus on diversification when you buy individual stocks
Establishing your investment strategy and in turn building your investment portfolio should be based on your knowledge and your comfort level. Personally, I invest in some individual stocks based on my research and experience with the companies.
For example, I shop at Costo, I use Apple products and I keep up with what's happening with both of these companies. I however have the bulk of my stock market investments in index funds. This is the investing strategy that works best for me and my comfort level.
However, individual stocks can be great for your portfolio but having broad diversification in a portfolio is the best approach.
How to buy individual stocks
Have you decided that investing in individual stocks is the right investment move for you? If so, then finding a reputable brokerage firm such as Charles Schwab, Vanguard, or Fidelity can make it much easier for you to start investing in individual stocks.
A broker can assist you by providing financial advice on everything you need to know about investing. They manage your brokerage accounts and advise you on what stocks to buy and sell, can help determine what the risks are, and also inform you on what can affect your investment portfolio.
So consider having a qualified investment advisor help you with your stock portfolio!
Alternatives to buying individual stocks
If you are still wondering "Should I buy individual stocks or find another investment strategy" don't worry! You don't have to buy a single stock. There are other ways you can diversify your investment portfolio and work towards building wealth. Here are a couple of options to consider:
So if you choose to go with the S&P 500 index fund, you will invest in every single one of the 500 companies that make up the S&P 500.
There are index funds for a variety of industries and companies. Check out our post "Index Fund Investing: How It Works And Best Funds" to learn more!
Exchange-Traded Funds (ETFs)
ETFs "combine features and potential benefits similar to those of stocks, mutual funds, or bonds." Although ETFs and Index Funds have similarities they definitely have their differences too. For instance, ETFs usually have lower investment requirements.
Another difference is the timing of trade which affects liquidity. Since ETFs are traded during the trading day, transactions clear faster. Index funds have to wait until the next day. Check out our post "The Difference Between ETFs and Index Funds for more information!
Try a Robo-advisor
If you aren't trying to just buy single stocks, a Robo-advisor can be an excellent alternative. It's never been easier for beginners to start investing their money to fund their futures. If you don't have much money to invest, then a Robo-Advisor is a great option to start investing.
You input your information and answer questions to determine your risk tolerance, and then the Robo-advisor will create a diversified portfolio based on the information you provide. So it's a perfect way to put your investments on auto-pilot.
Of course, you always want to regularly review everything with your finances and investments, but this can be great if you don't want to worry about things such as "What time does the stock market close" or what the stock market holidays are. That said, using a robo-advisor is great for those that want a more hands-off approach.
Here are a few Robo-advisors to consider checking out:
Again, Robo-advisors are a fantastic option for those that don't want to spend a ton of time worrying about all the details on stock exchanges and want a super-easy way to get started investing.
Buying individual stocks can be a great addition to your investment portfolio!
So, weigh the pros and cons when considering investing in individual stocks to decide if it's best for your investment goals. However, all in all, buying individual stocks can be an excellent addition to your investment portfolio.