Investing is touted as the golden path to building wealth. It’s the concept of putting your money to work and growing it over time. People talk about investments constantly, from crashes to windfalls, and everyone loves to explain their strategy and why it’s the best. With all this talk of the “perfect investment approach,” how do you know what’s right for you? Does that include buying individual stocks?

Well, let’s delve into that! A common question I get is whether buying individual stocks is a smart move. And if you’re reading this, you’ve probably pondered, “Should I buy individual stocks?” yourself.

In this post, I’ll be sharing my thoughts on investing in individual stocks, who it might suit, and the advantages and disadvantages to consider.

What is a Stock? 

A stock is essentially a piece of ownership in a company. These pieces are also called shares, and the owner is known as a shareholder.

Buying individual stocks allows you to invest in specific businesses. Another way to buy stocks is through products that bundle together the shares of many companies, like index funds or exchange-traded funds (ETFs).

When is investing in individual stocks a good idea?

Adding individual stocks to your portfolio can be a great way to boost your returns. However, the decision depends on your current investment experience and the make-up of your existing portfolio. Let’s break it down.

Buying Individual Stocks for Beginners

As a new investor, it’s wise to avoid putting all your eggs in one basket with individual stocks. This means focusing on diversification – spreading your investments across different assets to manage risk.

This could involve spreading your investments across a range of sectors (like technology, healthcare, and consumer goods) as well as different asset classes (such as shares, bonds, and property).

Exchange-traded funds (ETFs) and index funds are generally better choices for beginners as they offer greater diversification than individual stocks, which helps to reduce risk.

For first-time investors, it’s important to focus on understanding the fundamentals of investing. Building your knowledge in this area will empower you to become a more confident and informed investor, particularly when it comes to deciding when to invest and which stocks (if any) to choose.

Buying Individual Stocks: A Seasoned Investor’s Approach

If you’re a seasoned investor, you’ve likely already got a well-diversified portfolio. In this case, adding individual stocks can be a strategic move. However, careful research is still crucial to ensure these new investments align with your overall portfolio and long-term goals.

This in-depth research might involve:

• Targeted company risk assessment: Evaluating the company’s specific vulnerabilities and potential threats.
• Financial statement analysis: Deep-diving into the company’s financial health through its financial reports.
• Management team scrutiny: Assessing the leadership’s experience and track record.
• Growth potential exploration: Investigating the company’s prospects for future development and market expansion.

By conducting this thorough research, you’ll be in a stronger position to make informed decisions about individual stock purchases that complement your existing portfolio strategy.

The Advantages and Disadvantages of Picking Individual Stocks

The world of investing can be daunting, especially with the stock market’s reputation for volatility. This might leave you wondering if buying individual stocks is the right move for you.

Market ups and downs shouldn’t deter you from building your wealth through investing. To help you decide if individual stocks are a good fit, let’s explore the advantages and disadvantages.

Advantages of Buying Individual Stocks

There are several compelling reasons to consider individual stocks. Let’s delve into the advantages first!

Control Over Your Investments: When you buy individual stocks, you get to choose which companies you want to own and how much to invest in each one. This level of control isn’t available with mutual funds, where you have limited influence over the specific holdings within the fund. You also decide when to buy and sell individual stocks, unlike with a fund that has its own trading schedule.

Potentially Higher Returns: Individual stocks have the potential to deliver higher returns than some mutual funds, particularly those that track a specific index. This is because you’re not limited to the average performance of the entire market sector. However, it’s important to remember that higher potential rewards also come with higher risk.

Reduced Fees: Unlike mutual funds that typically charge ongoing management fees and expense ratios, buying individual stocks allows you to avoid these additional costs. You’ll just pay the brokerage fees associated with buying and selling the stocks.

Disadvantages of Buying Individual Stocks

Lower Diversification: When you buy individual stocks, your wealth is concentrated in just a few companies. This lack of diversification can be risky, as a downturn in one company’s fortunes could significantly impact your overall portfolio. To mitigate this risk, you would need to buy a significant number of individual stocks, which leads to the next drawback…

Increased Time Commitment: Effectively researching and managing a portfolio of individual stocks requires a considerable investment of time and effort. You’ll need to stay informed about the companies you invest in, as well as market trends as a whole. This can be overwhelming for busy individuals or those new to investing.

Trading Fees: While you avoid ongoing management fees associated with mutual funds, there are trading fees to consider when buying and selling individual stocks. These fees can add up, especially if you trade frequently.

Potential for Emotional Decisions: The stock market can be volatile, and it’s easy to let emotions cloud your judgement. Investors may be tempted to sell stocks in a panic during a downturn or hold onto losing stocks for too long hoping for a recovery.

Thinking of Buying Individual Stocks? Here’s How to Get Started

If you’ve decided that investing in individual stocks aligns with your financial goals, choosing a reputable stock broker can make the process much smoother. Here in the UK, some popular options include Hargreaves Lansdown, AJ Bell Youinvest, and Interactive Investor.

Consider seeking guidance from a qualified financial advisor. They can manage your investment accounts, offer stock recommendations, help you assess risk, and keep you informed about factors that can influence your portfolio.

However, if you’re comfortable going it alone, here’s a general roadmap:

Open a brokerage account: This online platform allows you to buy and sell stocks. Research different brokers to find one that suits your needs and fees.

Fund your account: Deposit money into your brokerage account to use for buying stocks.

Research potential stocks: This is crucial! Analyse company financials, news, and industry trends to make informed decisions.

Place your order: Once you’ve chosen a stock, instruct your broker to buy it at a specific price or within a certain range (using a limit order).

Monitor your investments: Keep track of your stocks’ performance and adjust your strategy as needed.

Alternatives to Picking Individual Stocks

Unsure about buying individual stocks? Don’t worry! There’s no pressure to jump straight in. You can diversify your portfolio and build wealth in several ways. Here are a few approaches to consider:

Index Funds: Investing in index funds can be a smart alternative to picking individual stocks. These funds are designed to track a specific market index, such as the FTSE 100 or the NASDAQ. By buying an index fund, you’re essentially investing in all the companies within that index. For example, investing in a FTSE 100 index fund means you’re buying a small slice of ownership in each of the 100 largest companies listed on the London Stock Exchange.

Exchange-Traded Funds (ETFs): Similar to index funds, ETFs track a basket of assets, but they trade on a stock exchange throughout the day like individual stocks. This allows for more flexibility when buying and selling compared to index funds, which typically trade at the end of the day.

Fractional Shares: Some brokers now allow you to invest in fractional shares of companies. This means you can buy a portion of a share, rather than needing the full amount to purchase a whole share. This can be a great way to invest in expensive stocks or to diversify your portfolio with a wider range of companies.

Robo-advisors: These automated investment platforms use algorithms to build and manage a diversified portfolio based on your risk tolerance and financial goals. Robo-advisors are a good option for beginners or those who don’t have the time or interest to actively manage their investments.

Robo-advisors: A Simple Way to Start Investing

If you’re looking for a hassle-free way to start investing without getting bogged down in the intricacies of the stock market, Robo-advisors might be a perfect fit. These automated platforms use algorithms to create and manage a diversified portfolio based on your risk tolerance and financial goals.

Here are some well-regarded Robo-advisors in the UK to consider:

Nutmeg: One of the UK’s longest-established Robo-advisors, Nutmeg offers a range of investment plans with competitive fees.

Moneyfarm: Focused on providing personalised investment solutions, Moneyfarm tailors their portfolios to your specific needs and goals.

InvestEngine: Known for their low fees, InvestEngine is a good option for cost-conscious investors.

Wealthify: A great choice for beginners, Wealthify allows you to start investing with a low minimum investment amount.

Robo-advisors are a convenient option, especially for those who:

• Are new to investing
• Don’t have the time or interest to actively manage their portfolio
• Want a low-cost way to invest

Investing in individual stocks can be a tempting proposition!

However, it’s important to weigh the advantages and disadvantages carefully before diving in.  Consider whether buying individual stocks aligns with your overall financial goals and risk tolerance.

Ultimately, adding a selection of carefully chosen stocks can be a great way to diversify your portfolio and potentially boost your returns. Remember, thorough research is key before taking the plunge.