Choosing individual stocks to invest in can be a daunting task for any investor.
There are so many different companies out there, and the decision of which one to choose is often an overwhelming process.
If you have never invested in individual stocks before, or if you’re looking for some guidance on how to make your first investment, then this blog post is for you!
What to Consider Before Investing in Individual Stocks
Before you invest in any stocks, it’s important to understand a handful of important considerations you should make.
- How much to invest. You’ll want to know how much money you want to invest. You should consider this money you won’t need for at least five years. It is always a good idea not to overextend yourself financially by investing in the stock market with money you’ll need sooner than that timeframe.
- Understand your investing goals. You’ll want to know what you are investing for. Are you saving up for retirement? Do you have some funds ready in case of an emergency? It is important that your investment goals line up with your time frame, so don’t invest if there is not enough money set aside.
- Consider the risk involved with each investment. Know how much risk each stock has before buying. This is a pivotal step and not something readily known beyond understanding a company’s valuation, performance potential and competence of management. A good measure to approximate this risk is through the stock’s standard deviation or its Beta measure, meaning how its average returns correlate with the broader market’s over a longer period of time.
- Determine how much you are willing to invest in stocks. If you’re just starting out as an investor, it might be a good idea not to put too much money into the stock market right away – only invest what you are comfortable losing. This way there is less of an emotional attachment if the stock goes south.
- Figure out your risk tolerance. If you are conservative with your investments, it might be a good idea to avoid the more volatile stocks. If you’re not too worried about risk, this is a great time to try out some of those less-stable securities for big returns.
How to Research Individual Stocks
Researching a company’s financial situation is called fundamental analysis.
This is a measurement of how much the company owes to creditors and shareholders versus how much it has in assets like cash, stock, equipment or other owned assets.
How to Find Good Companies
Once you know what to look for in your research, you can begin to sort through companies to find the good ones.
ETF index fund fees may be lower than mutual fund fees because they don’t need to charge fees like 12b-1 fees to market and promote the mutual fund to investors. ETFs trade openly on exchanges and do not need to pay such fees.
Some Companies to Consider
Index fund investing handles a lot of the heavy lifting for you with a simple purchase or series of purchases.
You may also want to consider investing in a sector or industry ETF that tracks specific industries like tech. You’ll see some of the same companies but you’re less likely to have all your eggs in one basket if something should happen with any company.
Risks to Investing in Individual Stocks
But, as said above, there are a few things you’ll need to consider before diving in.
1) Have more volatility.
Individual stocks can be volatile which means they will have more ups and downs than an index fund, but also can experience greater long term gains as well.
- Does this company cater to my needs?
- If I’m looking for tech stocks, does this company produce technology that will be the next Facebook?
- Is it a recently-private company or has it been public company for a long time? How is its stock history performance?
- How much volatility can I handle for potential gains?
If you’re not feeling comfortable with more volatile returns then index funds are probably better suited to your needs.
You may also want to consider an age old investment strategy known as dollar cost averaging to account for volatility in the stock price.
This means investing equal amounts into stocks over time instead of committing all at once which could help smooth out any fluctuations in price so if one month there’s a dip in value but an uptick six months later.
That way, you’ll avoid some losses by being less exposed during those dips and gaining from them too! It helps lower short term risk of timing the market perfectly.
2) Potential to go to zero.
Individual stocks, while rare, can go to zero. This is another downside of investing in stocks.
The potential for losing all your money with a single trade or company failure is high, which might be too much risk if you’re just starting out.
The upside to individual stocks though, is that they can produce huge returns and the knowledge that owning an entire business gives you – unlike index funds where it’s more like buying shares in companies rather than being their actual owner.
On the other hand, index funds can’t go to zero. That requires every company in the index being tracked to go out of business, which is highly unlikely.
Investing has always been considered one of the best ways to increase wealth but there are many considerations before taking this step so make sure to do thorough research first!
3) Possibility of underperforming.
Just as individual stocks can outperform a relevant market index, they can also underperform. Meaning, you’d have been better off investing in an index fund because you’ve not only have earned a higher return, but you’d also have taken less risk to earn the higher return.
About the Site Author and Blog
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to lay out our financial independence journey and connect with and help others who share the same goal.
I have not been compensated by any of the companies listed in this post at the time of this writing. Any recommendations made by me are my own. Should you choose to act on them, please see the disclaimer on my About Young and the Invested page.