There is absolutely nothing wrong with just investing in stocks with mutual funds. You can select a set of three to five index funds in different areas of the market, put your accounts on auto-fund and auto-invest, then go about your life. You’ll probably be in great shape if you are investing for a long time period. The market in general goes up over long periods of time and what you are doing with index fund investing is buying large segments of the market.
But individual stock investing has advantages. You can have individual stocks that go up very quickly, doubling in the period of a few moths or even a few days. If you create a portfolio of individual stocks, where you have maybe five to ten different companies, you also have some flexibility in what you sell and what gains you realize for taxes. In this post, we’ll talk about what it is like to invest in individual stocks so you can decide if it is something you want to try.
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What account do I need to invest in individual stocks
Individual stock investing has existed long before mutual funds and even longer before index funds and Exchange Traded Funds (ETFs). The stock market originally involved trading shares in companies directly. This was done by wealthy individuals and a few professional managers, usually working for wealthy individuals. Today really anyone can trade individual stocks since the tools needed to buy and sell individual stocks are widely available.
Individual stock investing requires that you go through a brokerage, which is a company that has the ability to place trades on the stock markets. There are many companies that specialize as brokers such as Merrill Lynch, Robinhood, and Chares Schwab. There are also many mutual fund companies that have started functioning as brokers. Some banks also have brokerages attached or have an arrangement with a brokerage.
Normally you will open a brokerage account with a broker. You then find the account by sending in money. You can then buy and sell stocks through that account. Stocks that you buy will be held there in what is called being in the “street name.” This means the shares you bought will be recorded as being owned by the brokerage. The broker will then have records linking the shares to you. You can also request a stock certificate be sent to you, which you can then keep at home or (much better) in a safe deposit box. Keeping the shares in the street name makes it easier to sell them.
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How do I figure out which stocks to buy?
You’ll need a source of information on companies to find stocks to buy. One that I use is Value Line Investment Survey, which is a paper and online service that provides information on companies including earnings history, management effectiveness measures, price momentum, relative stock safety, and other information. It is suited to my investment style, which is to buy companies long-term based on the company’s prospects for earnings growth and succeeding as a company in general. (You can learn a lot more about my investment strategies in Investing to Win.)
There are other sources of information that may be useful to you, depending on the investment style you choose to use. In general you get what you pay for, so if something is free, it probably isn’t very valuable. That said, Yahoo Finance does actually have a lot of information and is free to read. There are probably other sources that are free or that use advertising to generate income for their work.
Online and offline periodicals can also provide useful information, especially when it comes to identifying companies to find out more about. Sources like like Forbes, Barrons, and The Wall Street Journal all discuss the prospects for different companies and can provide leads for you to further research. One issue, however, is that a lot of people read these sources, so the stock may move up or down immediately after they put out a story, later to move back to where they were after the story fades. This will mean you may pay a premium when buying or sell at a discount if you act right after the story comes out.
What is the experience of buying individual stocks?
Individual stock investing can be very exciting. Many people get involved in trading stocks, where they try to buy and sell fairly rapidly to make a profit. Some people are day traders where they try to buy and sell many times within a day and take advantage to small price movements. Other are swing traders who try to make money over a few weeks or months.
Sometimes trades go really well. Day traders can make 5-10% or more on a trade, which translates into huge yearly returns if they can do it every day. You can double your money in a few weeks or months if you pick the right stock at the right time when swing trading.
A lot of this is luck, however, and most traders are lucky to break even or make a few percent return each year. It also involves a lot of record keeping for taxes and fees to brokers and others. Many people decide it isn’t worth it after trying it for a few years.
If you’d like to learn more about how to decide how much you should put in different types of assets, Sample Mutual Fund Portfolios gives lots of information and examples of how to make allocations for all sorts of different goals, including retirement.)
People who have invested for a long time normally become buy-and-hold investors. They learn that they can buy a great company and then hold onto it for years or decades. This means that they just need to find great companies with a good potential to do well in the future. They don’t need to be right about the timing of when the stock will do well. They just need to pick good companies.
This is really not a lot more difficult or time consuming than buying mutual funds. It takes a little time to get a watch list of good companies. Again, using something like Value Line Investor Service can be useful for this. After you have your list together, it is just a matter of adding investments in the watch list companies as you can, trimming positions as they become too large, and selling a few companies as you discover that they don’t live up to the potential you saw or things change at the company.
If you already have your retirement funds in a set of index funds, you may find that individual stock investing is something you would like to do on the side in a taxable brokerage account. If you do, the first step is to get some books on investing and start learning. Then, practice with some play money until you are comfortable taking up a real position. From there, you just learn and build.
Have a question? Please leave it in a comment. Follow me on X to get news about new articles and find out what I’m investing in. @SmalllIvy
Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
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