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.
