Investing in Individual Stocks: Should You Do It?

Some of your investment dollars would likely end up
in stocks, whether you’re investing through a broker, for retirement, or with
an expert advisor (EA). However, holding individual stocks is not as common as
owning stock mutual funds and exchange-traded funds (ETFs).

Now the question is,
should you avoid buying individual stocks completely? Or should you hold some
to take advantage of the benefits that only individual stocks can offer?

Why Should Investors
Own Individual Stocks? 

Better Control

With funds, you don’t
have control over where your money goes. Instead, you hold investments selected
by fund managers who need to satisfy the fund’s governing conditions. Moreover,
if you invest in mutual funds, you might not even have a clue which stocks are
owned by the funds.

In contrast, investing
in individual stocks let you have full control over where you should put your
money into. That would also require you to conduct your own research, determine
how much you should invest in each company, and decide on the time to buy and
sell your shares.

Plus, owning individual
stocks allows you to choose companies that align with your values, like what
you can do with socially responsible investing (SRI) or environmental, society,
and governance (ESG) investing.   

Growth and Dividends

Stocks can help you
make money through growth or dividends. With growth, you buy stocks at a low
price and sell them for a price higher than what you paid to own them.

Investors following a
buy-and-hold strategy and aiming for intrinsic value hold individual stocks for
the long term, typically in months or years. On the other hand, day traders
only hold stocks for minutes or hours.

Long-term and
short-term investors have different ways of investing stocks, but they share
the same objective: Buy stocks at a discount and sell them after their prices
climb.

Additionally, you can
turn a profit with dividend-paying stocks without selling the shares. If a publicly
traded company is performing well, it has the option to return some of its
profits to shareholders in regular dividends.

Reduced Fees

Unlike investing in
mutual funds and ETFs, owning individual stocks does not require you to pay the
fund company a management fee that could reduce your returns. Rather, you pay a
fee when you purchase or sell a stock.

While the average
expense ratio for mutual funds is between 0.5% and 1.0%, it could still eat
into your returns over the long term.

But with individual
stocks, you don’t need to concern yourself about such costs since they don’t
charge management fees, which means more returns for you. However, keep in mind
that that also means you will need to take care of all the risks associated
with owning individual stocks.

Should I Invest in
Individual Stocks?

Buying individual
stocks has its own set of risks, although there could be some situations where
it is a good idea.

If you already have a
solid, well-diversified portfolio and still can take some risks, you can use a
few of your investment dollars to hold individual stocks. This is also ideal if
you’re optimistic about the potential of a specific public company.

You can invest in
stocks as long as you have a good grasp on the risk that comes with owning
them. If you like studying companies and making educated guesses based on
various analyses and forecasts, individual
stocks can offer you the opportunity to generate excellent returns at
significantly low costs.