The Risk of Investing in Individual Stocks

When you invest in the stock market, your money is going into a company and its growth potential. Each company you buy shares of represents an ownership stake in the business. Because there is no perfect time to invest in stocks, you need to find the right entry point and stick with your plan regardless of how volatile the market may be at any given time. Investing in individual stocks can be a risky venture because it means putting your money directly into a small company that could fail at any moment. On the other hand, investing directly in these companies has several advantages as well. When done correctly, investing in stocks can be an excellent way to grow your money faster than keeping it in traditional investments like CDs or mutual funds.

Things to Know Before Investing in Individual Stocks

- You will have to do a lot of research.

- You will need a lot of money to get started.

- This is not the best option for beginners.

- You will have to be flexible. For starters, you should know that researching individual stocks is a completely different game than just buying shares in a company that trades on a major stock exchange. For example, the top three stocks in the S&P 500 are highly recognizable companies that almost everyone has heard of. And while they are excellent companies to invest in, they are also extremely risky. When you invest in individual stocks, you might make a great decision, but if the company suddenly goes out of business, your investment is worthless. You need to be flexible enough to be able to change course at a moment’s notice when you need to.

- You will have to be patient. Investing in individual stocks is a long-term game. Don’t expect to make a fortune overnight. Many professional investors recommend that you never sell a stock that has had a profitable run because it is almost always better to let it run.

Types of Investment Strategies

When investing in individual stocks, your strategy is what will determine how successful your investment will be. The best strategy for you will depend on your unique goals and risk tolerance, as well as your investment amount. Here are a few strategies to get you started:

- Buy and Hold: This is the simplest and most common strategy for investing in individual stocks. Essentially, you find a few stocks that you feel have strong fundamentals, purchase a small portion of each, and then hold onto them for as long as possible.

- Growth Investing: Growth investing is a strategy that focuses on finding companies with strong fundamentals that are expected to experience growth in their stock price over the long-term.

- Momentum: long-term investing is a strategy that focuses on stocks that have had a significant growth spurt in the last six months. Momentum investors believe that these stocks are poised to keep up their strong performance shortly.

- Value Investing: Value investing is a strategy that focuses on finding stocks that are undervalued by the market and trading at a price that is below what the company’s fundamentals are worth.

- Contrarian Investing: Contrarian investing is a strategy that focuses on finding stocks that are out of favor with the market.

The Pros of Investing in Individual Stocks

- You are in control. When you invest in a single stock, you are in control of every aspect of the investment. If you find an undervalued company, you can do whatever it takes to be able to buy as many shares as you can afford. If you find a promising start-up, you can get in early and reap the rewards if it ends up being wildly successful.

- You have the potential for high returns. When you find the right stocks and buy shares during the initial public offering (IPO), you can experience significant returns within a short period.

The Cons of Investing in Individual Stocks

- You are responsible for your due diligence. Most investors find it challenging to stay current on all the information that is relevant to individual stocks. You have to keep up with the latest results and news related to the company you’ve invested in to make the best decisions for your money.

- There is a greater risk. Because you are responsible for your due diligence, you are also liable for any loss that occurs as a result of poor decisions. If you decide to invest in a company that is struggling, you risk losing a great deal of money.

Bottom Line

Investing in individual stocks is a great way to grow your money, but it comes with a high risk. To minimize the risks involved with investing in individual stocks, make sure you do thorough research and stay informed.