If you are thinking about investing in individual company stocks, what should you consider? In today's episode we discuss:
- Risk versus Reward: A company that does well has the potential to have its stock price go up over time, making you a lot of money. However, the opposite is also true: you can lose all your money if it goes out of business.
- Diversification: Owning a single company makes you tied to their individual success or misfortune. Even if the sector or economy does well, you may not make money.
- Portfolio: You can create your own portfolio using individual stocks - but it takes quite a few (20+) to get real diversification. Or you can invest a majority of your portfolio into low-cost index funds and use a small portion in individual stocks.
What are the pros of owning individual stocks?
- No trading fees
- Complete control: own exactly what you want to
- Tax management: Buy and sell for tax advantages, when you want.
What are the cons of owning individual stocks?
- Diversification: it's harder to diversify your holdings
- Time: it takes time to monitor your portfolio
- fees: there are trading fees including spreads
- Emotions: It's hard to not get carried away by emotions when evaluating your stocks
Ultimately it's up to you to decide if you want to invest in individual stocks. Just make sure you understand the risks and go in with eyes wide open!
