For anyone who thinks of getting involved in the art of investing, the first thing that comes to their mind is the infamous stock market. I am sure you have heard about it a million times from friends, family, and social media showing you ads of how profitable investing in stocks can be. Have you ever wanted to try it out? Have you ever had the thought of investing your extra money in individual stocks?
In today’s online world, earning profits while sitting in the comfort of your home is everyone’s dream. Individual stock investing allows you to achieve this. However, it carries its pros and cons.
In this article, we plan to discuss how individual stock selection works, its good and bad points, and if it is the right way to build portfolios after all.
What is Individual Stock Investing
Individual stock investing is when the investor selects a single stock, for example, a share in a major company, and invests all his fortune in that single stock. Single stocks are the typical investment choice. Each stock stands for a share of ownership in a company. As the company expands in value, the value of individual shares grows in sync. Individual stocks are comparatively simple to understand and have a clear value structure.
Stocks are available to buy every company or business. However, it is important to research and understand what company is worth spending your fortune for.
How it works
When one invests in an individual stock, they are buying ownership. If a person invested in 50 shares of a public company, that individual would have a specific percentage of ownership in that company. Companies initially go public to give out shares to investors to raise funds to start, expand, and grow. Once the beginning shares are purchased, the shares can then be bought and sold via an exchange or digitally amongst buyers and sellers, usually helped out by stockbrokers.
You can make a profit through stocks in two different ways. One way is via the price appreciation of the stock. The other way is to make profits with the help of dividends, which are the company’s profits, paid to the shareholders.
How is Individual Stock Picking different from other Investing Techniques?
There is a vast number of investing techniques and subcategories you can choose as your primary investing strategy. In this subheading, we will compare individual stock picking with its competitive techniques.
Individual Stock Investing Vs. Mutual/Thematic Funds
Investing is of two major types, stock market or index funds. Stocks are riskier as compared to mutual funds. The diversified equity mutual fund branches out your investment across sectors and industries, thus increasing your investment stability. You have to go through thorough research to choose the right stocks before investing your money. Experts research mutual or thematic funds and a professional fund manager manages your investment. This service is not free and comes with annual management fees charged by the company you choose.
Is Individual Stock Investing Worth It?
Different companies use different investing techniques according to their clients, ideas, and general business philosophy. We at RVW Wealth have a very specific philosophy, and we have our way of dealing with clients who are willing to invest. Our investment philosophy follows several tenets: We do not pick individual securities or make prognostications on the market’s future directions in short- or near term. Rather, we take a very long-term, disciplined approach to investing that preaches diversification and avoiding market timing. Individual stock investing does not fit into our policies; however, we will discuss the pros and cons of individual stock selecting as viewed by different companies and investors in the following paragraphs.
Advantages of Individual Stock Investing
- Takes Advantage of the Growing Economy
As the economy grows, so do corporate earnings. That’s because economic expansion creates jobs, which creates income, which boosts sales. The bigger the paycheck, the greater the boost to consumer demand, resulting in higher revenues for cash registers. It helps to learn about the phases of the business cycle: growth, max, contraction, and trough.
- Easy to Buy and Sell
The stock market makes it fairly easy to buy shares of companies you desire. You can get them with the help of a broker, a financial planner, or online. Once you have made your account, you can own stocks in minutes. Some online brokers might even let you buy and sell stocks commission-free. Furthermore, stocks are convenient to sell back. ‘Liquid’ is the term used commonly for stocks as you can sell them any time via the stock market with low transaction payments. This comes in handy when you need your money immediately at any point.
- Individual Stocks Are Cheaper
When purchasing individual stocks, you have to pay comparatively fewer fees. You no longer have to pay a fund company a management fee for investing your assets, like index funds. Instead, you pay a fee when you purchase the stock and when you sell it back. There are no additional costs other than that. The longer you keep the stock, the lower your cost of ownership is. Since fees have a big impact on the money you will make, this alone is a good reason to own individual stocks.
Disadvantages of Individual Stock Investing
- Difficult to achieve Diversification—Higher Risk
Depending on what study you are aiming for, you should hold between 30 and 100 stocks to attain adequate diversification. Keeping portfolio theory in mind, this carries more risk with individual stocks unless you own many stocks.
The less money you have, the harder it becomes to achieve this diversity. Especially when you are a beginner at investing, you are subjecting yourself to more risk due to the lack of diversity. In simple terms, if the stock you choose does not work out as you wanted; you will lose all your precious money.
- It requires more time and effort
It takes more time for you to observe your portfolio. You need to make sure that the companies you’ve invested your fortune in are not having any difficulties that could result in your loss. You also need to keep an eye on the industry and economic trends. You are your portfolio manager, so you have to take the time to ensure you don’t end up in a declining position.
- Emotional Rollercoaster
Stock prices rise and fall constantly. Investors tend to buy high out of greediness and sell low out of anxiety. The advisable thing to do is not frequently look at the price fluctuations of stocks and check in regularly.
- Competition with Professional Investors
Professional Investors have far more sophisticated tools and techniques, which obviously, gives them an advantage over common investors. This can be the cause of your losses, as professional investors will wipe out most of the profit the stock market has to offer.
Like every other thing, investing in individual stocks has its benefits and bad point all the same. But, the important thing to note here is that the major disadvantage is the risk involved. If, unfortunately, you get struck by a heavy loss, it can be a very overwhelming and depressing experience and can scare you from investing ever again. RVW Wealth can offer you a better, more advanced way to invest your money, which will bring you higher returns with easy and accessible methods, allowing your mind to stay at peace.
September 01, 2021