As novice investors, a lot of people will turn to options like mutual funds and ETFs, particularly when they’re just getting started. A mutual fund, for example, is a collection of diversified holdings that are professionally managed, and an ETF is similar. These funds have benefits for new investors because they are managed, and also usually very diversified which can protect against significant losses.
Mutual funds and ETFs often provide a more reliable way to get a decent return on your money than individual stocks, but some people are interested in individual investment options because while they are riskier, they can also offer better returns.
The following are some key things to know about investing in individual stocks and understanding how to choose the best stocks to buy.
Learn About Industries
If you’re going to be investing in individual stocks, it’s important to learn first and foremost about industries and what the particular trends are there. This will give you a good starting point. For example, you might be interested in energy or financials, and you can start looking at current news stories in these industries and predictions as to where they’ll go in the short and long-term.
There are possible downsides to investing individually, but also upsides. One of the benefits of investing in individual stocks is that you’ll often pay lower fees. Most funds carry annual management fees that you have to pay in addition to trading fees.
Dealing with taxes tends to be easier with individual stocks as well. When you invest in a mutual fund, for example, the fund is the determinant of how gains or losses are taken, so you don’t have a lot of control when it comes to optimizing your tax scenario.
If you don’t have a huge amount to invest initially, you might avoid individual stocks. Individual stocks tend to work better for high-income and high net worth investors because if they were to lose money, it wouldn’t be as big a hit.
It’s also tough to achieve diversification without an ETF or mutual fund if you don’t have a lot of money available for investment.
If you invest in individual stocks, you need to have an adequate amount of time to dedicate to it. You’ll need to continuously monitor your portfolio and the companies you’re invested in, to make sure there isn’t potential trouble on the horizon.
Also if you’re an emotional investor, individual stocks can be tough to stomach.
On the other hand, when you invest in a mutual fund or ETF since there is so much diversification there’s not as much worry about losing a lot of money at one time. It also requires basically no time commitment from you as the investor, since a fund is professionally managed.
Finally, if you want to invest in an individual stock, you should look at the price/earnings ratio rather than looking at the companies that are getting the most media attention. The lower the price/earnings ratio, the more there is a likelihood of reliability in long-term returns in most cases.
Categories: Stock Market