Investing
December 7, 2018

Risks And Rewards of Buying Individual Stocks

Simple. Thrifty. Living.

Investing in an index or managed portfolio can help grow your wealth, but you don’t have to follow plans established by experts. Instead, you can purchase individual stocks.

Like all investments, there are pros and cons to buying individual stocks. Before you decide whether it makes sense for you to buy a stock, you should consider the potential rewards and risks.

As long as you buy stock in a successful company, you have an opportunity to earn a lot of money by focusing on individual stocks instead of managed portfolios. When companies put together managed accounts, they include diverse companies to protect their investors from dips in the market. You don’t get the same protection when you buy stock in one company, but you get a chance to earn higher returns by avoiding stocks that don’t perform well.

Since you only have to pay attention to one company’s stock, you can plan when to buy and sell. Ideally, you should buy the stock when it’s cheap and sell when it’s expensive. If you time it right, you can boost your returns even more.

You also benefit from avoiding management fees. Instead of paying a monthly or annual fee, you only pay a fee for buying and selling your stock. You can put that money back into your investment instead of giving it to an account manager.

Each benefit of buying individual stocks has a corresponding risk. When you focus on one company’s stock, you lose the safety of diversification. If the company you chose loses value, then your investment’s value will plummet without help from rebounding companies to offset the loss.

You also lose the expertise of having a professional manage your investment. That means you will have to spend a lot of time researching companies before you buy. Once you choose a company, you have to keep a close eye on the value. Owning stock means that you will need to review the company’s performance at least once per day. If you don’t know how to research companies and decide when to sell stocks, then you’re at a big disadvantage against investors with more experience.

If you choose to buy individual stocks, it makes sense to add diversity by purchasing stocks in various industries. Without variety, you stand to lose most or even all of your money. One bad day could literally wipe out your investment, so do your best to spread your wealth around to add some protection to your investment strategy. If you decide you’d rather help investing, consider using a robo advisor instead. The best robo advisors will help beginners automate their investments and answer questions about their money. Explore some of these, such as Betterment or Wealthfront, if you decide you’d like a little (or a lot) of assistance.

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