Should you pick stocks? How do you choose good stocks? These can be burning questions for new investors. Read on to find some answers for your portfolio.
A lot of investing advice online focuses on the stock market – which makes sense. The stock market is an accessible way for everyone to invest.
You can buy one stock or even partial shares in a company. There are a lot of platforms that cater to smaller investors.
However, there are also many investment options available to everyone.
As a beginner investor, even if you have done your homework and decided that investing is the right next move for you and your money. Now you must make a few more decisions. Where exactly in the stock market should you invest? It can get overwhelming!
We often hear about the sexy “investment” opportunities with high upside potential—options, cryptocurrency, or volatile industries – like technology, marijuana, etc.
These are also stocks that have large downside potential.
Because of the inherently high risk of these stocks, people may choose to sit on the sidelines and forgo potential returns.
In today’s market, there are a lot of opportunities to invest in different securities. Individual investors can participate in the stock market through ETFs, Index Funds or individual stocks.
ETFs and index funds can be a good starting point for investing money for beginners and risk-averse individuals.
Should you invest in individual stocks?
That depends. I do invest in individual stocks because I enjoy the DIY investing approach.
Does that mean it is for everyone?
No. Here are some reasons you might not want to pick stocks for your portfolio.
You don’t have enough money.
The volume generated by larger institutions drives market prices. They invest so much more into each trade that a 1% change in price might help them generate a decent enough return to make it worthwhile.
If you invest a small amount of money into one stock, that 1% will not result in a significant gain.
You’re paying retail.
There’s no such thing as a free lunch. Even with commission-free trading, your brokerage platform is making money. Here is information about how no-commission platforms like Robinhood make money from Investopedia.
You can’t react fast enough.
By the time you think about trade, another trader on a faster network has already gone in and out of the trade. Professional traders have access to more money, better information, and faster networks.
Retail traders like you and I are no match for larger institutional traders. Our stock quotes may be delayed by 10 or 20 minutes, which means that we cannot take advantage of quick-moving prices.
The market has already priced in the news.
Maybe you see that Apple is about to release a great new product and want to jump on to the stock.
Remember that means that others are also working with the same assumption. The stock market is the aggregate of buyers and sellers, driven by supply and demand. The more people who want the stock, the more they will have to pay to buy it.
Even if new information were to come to light, you have to decide if the stock price already reflects the news.
Your emotions will get in the way.
Many of us can’t afford to lose a lot of money. Most of us don’t want to lose hard-earned money. And rightly so. We worked hard for it.
This means we might get emotionally attached to the money we invest. When the market starts to get uncertain, it’s easy to make decisions that are not 100% rational.
No one can predict the future.
And if anyone tells you, they have a sure-fire investment, RUN!
There is never a guaranteed investment. The higher the rate of return, the higher the risk.
Even if you were to argue that you had access to all the information, there is no guarantee that a future event won’t hamper stock returns.
Photo by Olya Kobruseva on Pexels.com
How to Pick Individual Stocks?
If, at this point, I have not scared you out of picking individual stocks and your portfolio has room for a bit of risk, here are some tips to help you pick stocks.
I am by no means a professional. These are just some tips I’ve picked up along the way!
Don’t expect all your stock picks to be a success.
Not every stock you pick will be a successful trade.
Maybe you end up buying a stock at its peak. Perhaps the following earnings report did not match the investor’s expectations.
Even after you research the heck out of a stock pick, there’s no guarantee that it will return big.
Diversify: don’t put all your eggs in one basket.
When you bet all your money on one stock pick, you might as well be gambling.
Some studies say a fully diversified portfolio requires about 30 stocks. Others suggest that the number is closer to 50 stocks to diversify risk.
Of course, this is an oversimplification and a rule that might not apply to everyone. But it might help you decide if a stock has a spot in your overall portfolio.
Understand the downside
With every stock, there can be a significant risk.
The quicker stocks rise, the faster they fall.
Every stock comes with some downside risk. The stocks that have the potential to rise fast will also fall more quickly. Can you afford a stock to go down by 50%? What if it becomes zero? It is essential to look at individual stock picks in the overall context of your portfolio.
Do your research
Listen to everyone, but with a grain of salt.
Analyst reports can be a great source of information. But again, no one knows the future—even those who are making a living in predicting the futures of these companies.
Understand the business/industry
Each stock that you pick reflects a real business. The value of a company’s stock is based on the underlying business and industry trends.
Anything that can affect the company, will affect the company’s stock, for better or worse.
How long do you want to hold the stock?
Are you looking to hold for a few days, weeks, months or years? With stock picking, many people try to develop exit strategies to protect their portfolios from losses. Maybe you sell the stock when you have a gain of 50%. Some might sell a portion of the stock as it rises. Or sell when a stock loses 30%.
These exit strategies can protect your portfolio from losses you cannot afford. If you bought a stock with an exit plan in mind, it is crucial to stick to it.
Don’t get emotionally attached.
Unfortunately, if a stock has returned well in the past, there is no guarantee it will continue to do so in the future.
If a company has a new competitor or new regulations in the industry, the stock’s valuation can take a hit and cause it to drop significantly. If you are emotionally attached to a stock, it can hurt your portfolio and your returns.
Be prepared to do the work.
I’m not going to sugarcoat it. Individual stock picks requires work on your part. Any bad news (or good news) on a single stock will affect your portfolio more if you hold the single stock than if it were part of a basket (like an ETF).
Prefer a more hands-off portfolio?
If you prefer a more hands-off portfolio, learning to invest with ETFs can be good for you and your money. Here are some tips to help you invest in ETFs, even if you are a beginner investor.