The stock market can be a rollercoaster ride for investors. As it has ups and downs - with the power to make or break one's portfolio. This has been especially true with the recent pandemic affecting the markets with huge fluctuations which in turn has led many to question the value of trading individual stocks.
Given the constantly evolving nature of the market, it's understandable that investors may be uncertain about the benefits or potential drawbacks of investing in individual stocks and asking themselves if it’s worth taking the risk.
To explore this question, we will be taking a closer look at some of the advantages and disadvantages of trading individual stocks in comparison to other investment alternatives.
Benefits of Trading Individual Stocks
When it comes to the advantages of trading individual stocks, many would argue that it's the best way to invest due to you being able to control 100 percent of your trades. It has also never been easier to trade and manage your account due to the access of easy to use and reliable day trading brokers which offer stock trading through both technologically-advanced web and even mobile platforms.
You also have control over how you diversify your portfolio and spread your risk across different market sectors. This can help you minimize the impact of any negative news or events that could affect any particular stock or sector. Managing your own portfolio would allow you to control your account's level of growth which in turn can generate a higher level of return than traditional index funds.
With the control you have over your portfolio, it would enable you to invest in promising companies even with a small portfolio size as many brokerages are now allowing traders to purchase fractional shares. For many beginners, this is an amazing opportunity as you can buy just a fraction of a share and still reap the same percent return.
Investing in individual stocks can definitely be exciting, but it's important to acknowledge that it's not without its challenges. For some, they would find that researching and analyzing individual stocks can be incredibly time-consuming and requires a lot of effort. This doesn't work for most especially if they have a busy schedule. You must consider this along with other potential drawbacks to properly understand what would work for you and your portfolio.
Drawbacks of Trading or Buying Stocks
When considering the drawbacks, another major idea to consider is volatility. Prices can rise and fall rapidly and unpredictably, making it difficult to time trades and avoid losses. Even with extreme attention to trends and news, at any given moment the market can shift leaving your position potentially in the mud.
We all know that, from time to time, investors can find themselves overinvested in one or a few similar stocks in any given sector. This scenario was plain to see in the aftermath of the pandemic-induced market crash, particularly in the NASDAQ market. The market's substantial upswings during this period resulted in an overinvestment in the tech industry. This lack of diversification could have caused many traders to experience losses of over 50% had they solely invested in the tech sector.
As touched on earlier, time is one of the most valuable assets to a trader - but is also a huge drawback to many. Successful traders require significant amounts of time to properly research and keep up with news and current events. Investors need to stay up-to-date on market trends and news about specific companies in order to make informed decisions about when to buy or sell. You might not have enough time in your busy schedule to do this properly. If that’s the case, the time required to trade individual stocks can quickly become a disadvantage.
Despite these potential drawbacks, there are various risk management strategies that any trader can implement to their own style of trading and investing. One of the most common strategies is to properly diversify your portfolio as it spreads your risk among several industries. If any of these drawbacks discourage you, know that there are plenty of alternative investment options available that can yield favorable results.
Alternatives to Trading Individual Stocks
If you're looking for an alternative to buying individual stocks, there are several options available that can provide similar benefits without the added risks. The following are but a few options for you to consider.
Index Funds
An index fund is a type of investment fund that seeks to replicate the performance of a specific market index, such as the S&P 500. Essentially, an index fund invests in the same stocks as the index it tracks, in the same proportions. For example, if the S&P 500 goes up 5%, then an S&P 500 index fund will also go up 5%. This can be a great alternative to traditional investments as Index funds provide broad market exposure, diversification, and potential for growth, all while minimizing your risk.
Exchange-traded funds (ETFs)
Exchange-traded funds (ETFs) are another option that can provide similar benefits to individual stock trading. Like index funds, ETFs track a particular index, but they trade on an exchange like individual stocks. This means that they offer greater flexibility and can be traded throughout the day providing more control over the timing of your trades.
Exchange funds
Not to be confused with ETFs, exchange funds let you pool your stock with other investors to create a diversified fund. It's sort of like a mutual fund.Exchange fundsrequire a long-term commitment, but they can be a great way to diversify from an appreciated single stock -- without paying capital gains taxes up front.
Mutual funds
Mutual funds are a type of investment that allows investors to pool funds together in order to invest in a diversified portfolio of securities such as stocks, bonds, and other assets. The portfolio is managed by professional fund managers who are responsible for making investment decisions and managing the portfolio to achieve the fund's investment objectives. This type of investment can offer greater diversification than individual stocks, which can save you time and energy as you are entrusting a professional to manage your assets on your behalf. This also makes mutual funds a great option for those who prefer a more hands-off approach to investing.
With recent events, many are questioning the worth of investing or trading in the stock market. However, exploring alternatives such as index funds, ETFs, and mutual funds can offer a safer and more predictable approach compared to traditional investing. While it may require giving up some control, it also frees up time to learn more about the stock market's history and what best suits your needs.
Trading Individual Stocks for the Long Haul
Alright, so this example still involves trading individual stocks. But in this case, many of the drawbacks don’t really apply.
There are certain stocks that have a significant long-term appeal which are considered safer to invest in on a longer time horizon. An example is a blue-chip stock with a robust business model and years of earnings growth. An investment in such a stock doesn’t have the same time requirements as more short-term trading entails.
The same applies to longer-term dividend stocks, where investors primarily select stocks based on the dividend yield. For example, there are 68 total dividend aristocrats which solely include S&P 500 stocks with 25 more years of continuous dividend increases. Monitoring these stocks also requires less time and energy than actively trading individual stocks based on news and other market-moving events.
How to Determine if Individual Stock Investing is Right for You
Individual stock investing can be exciting and potentially lucrative, but it's important to consider whether it's the right approach for your investment goals and financial situation. Determining your risk tolerance is a crucial factor when it comes to investing in individual stocks. Evaluate whether you can handle the volatility of the stock market and whether you are willing to accept the possibility of losing your investment.
Because of this possibility, think about what your investment goals are. Ask yourself if you are looking to build wealth over the long term, or are you seeking short-term gain. Depending on your goals, different investment strategies may be more appropriate. Once you figure out what suits your needs, execute to the best of your abilities and never stop improving. If you can do this, then investing is for you.
Conclusion
Trading or buying individual stocks is still worth it - depending on your understanding of the market and what strategy you employ to manage risk.
Before diving into individual stock investing, it's important to assess your investment goals and financial situation. Consider whether other investment options, such as index funds, ETFs, or mutual funds, may be more appropriate for you. Due diligence is something that can never be neglected. In turn, your portfolio can survive and even thrive during troubling times in the market.
The key to successful investing is doing your research, diversifying your portfolio, and managing risk effectively. Implement what strategy works best for you and individual stock investing can be a rewarding and profitable approach to building wealth and securing your future.
