Individual stocks are shares of stock issued by a single company, and investing in them has a unique set of advantages and disadvantages. For instance, the potential for growth is much greater than it is when you invest in the entire market. Plus, it allows investors to make much more targeted investments.
Of course, there can also be downsides the investing in individual stocks. Investing in just one company means there is substantial risk. And you are almost certainly missing out on opportunities elsewhere in the market.
That being said, we would never suggest putting your entire portfolio in a single stock. Even if you participate in a stock sharing plan at work, having a well-rounded portfolio is key to long-term success.
Still, investing a small part of your portfolio in a handful of high-performing individual stocks can be a great way to give your returns a boost. If that is something that interests you, read on to find out how to get started.
Stock Trading vs. Stock Investing
The stock market is a complicated place, and there are many different strategies people use. You see anything from day trading, where people generally buy and sell stocks within the same day, to long-term investing, where people buy and hold for years. If you are investing for retirement, you likely err more toward the latter.
The easiest way to understand the difference between trading and investing is what you hope to get out of it. Traders are generally much more active and look to trade part-time or even earn a full-time living from it. As you might expect, active trading takes up a lot more time, and if you are a day trader, you must be able to trade while the market is open (hence the name).
Investors, on the other hand, have a full-time job that is separate from their stock market activity. They tend to use stocks to invest more passively, building a nest egg to help secure their retirement.
- Determine Your Trading (or Investing) Strategy
If you want to buy individual stocks, you must first decide whether your primary strategy will be more active or more passive. This will influence where end up buying your shares. Remember, if you want to be a day trader, you must be able to trade while the market is open. If you have a day job you don’t intend to leave, you will probably be more passive.
But even if you are passively investing in stocks, there is potential for greater returns than you could get with mutual funds, ETFs, and index funds. It’s important to determine what your style will be, though, because day traders require more advanced features and lightning-quick execution times.
- Choose Your Platform
Once you have mapped out what your trading or investing style will be, it’s time to pick your trading platform. You must determine your strategy first because there is a wide variety of different trading platforms, and some are more robust than others. Even at this step, you have a few different possible approaches:
- Full-service stock broker. This option is the equivalent of a bank with brick-and-mortar locations. They offer a range of services which may include proprietary research, retirement planning, and tax prep. However, fees are also higher.
- Discount broker. These brokers are a very popular these days and you can find several of them listed in the “trading platform” link above. This is like the online bank equivalent of brokers; fees are much lower, but there are usually no brick-and-mortar locations.
- Direct stock purchase plan. It is also possible in some cases to buy stock directly from the company issuing it. This means you avoid the broker altogether. However, not all companies allow individual investors to buy stock this way.
- Determine Your Trading/Investing Budget
Once you know where you will buy your shares, the next step is to determine how much money you will actually put toward your trading endeavors. The good news is that these days, you don’t need a huge amount of money to get started.
Full-service brokers may require you to have $10,000 or even $100,000 to get started, but such is not the case with discount brokers. And these days, many discount brokers and trading apps offer fractional shares, allowing you to invest as little as $1 or even less in some cases.
The more money you commit to trading, the more you stand to gain (or lose). For day trading, there is a minimum equity requirement of $25,000, per FINRA rules. If you have less than that, you can start with a more passive strategy and perhaps move to swing trading later if you want to be more active.
- Research Your Investments
Researching your investments is of course key to success, whether you are trading or investing in individual stocks. It can be overwhelming to know where to start, especially if you are brand-new to this style of trading. However, here are a few points to get you started:
- Blue-chip stocks are a good starting point. Blue-chip stocks are the ones you’ve heard of, such as Apple and Amazon. These are big companies with a long track record of success and a high likelihood of continued success. These are great if you are holding for the long haul.
- Evaluate the company’s fundamentals. One of the common numbers to check is price-to-earnings (P/E) ratio. This number of calculated by dividing to share price by the earnings per share (EPS). The historical range of PE ratios for the S&P 500 is 13 to 15; lower is generally considered better. However, you must also consider the PE ratios of the company’s competitors.
- Evaluate the industry. As mentioned in the previous point, familiarizing yourself with your company’s competitors is important. For example, searching whether the industry as a whole is growing can give you clues. If you are dealing with a shrinking industry, you may want to look elsewhere.
When in Doubt, Try a Stock-Picking Service
We all lead busy lives, and that can make it tough to find the time to do in-depth stock research. More importantly, if you are new to buying individual stocks, you may not really know what to look for at all. But there is no shame in that.
If you don’t have the time and/or know how to do your own research, consider a service like The Motley Fool. Picking stocks is their bread and butter, and they do all the research for you. Plus, stock advisor, the company’s most popular service, will only cost you $99 for your first year.
- Start With Paper Trading
Paper trading, or simulated trading, is a great way to start if you are new. It allows you to trade just like a “real” trader would, except you use fake money. Everything else is real market activity, though. So you can’t make money doing it, but you can’t lose, either. It allows you to practice trading and learn the market before you dive in for real.
More and more brokers are adding paper trading since it’s a great way to attract new people. One good place to give it a try is TDAmeritrade with its paperMoney feature.
- Get Trading!
So you’ve practiced trading on the bunny hills; now it’s time to join the big leagues! Okay, perhaps your trading budget will still be relatively small. But if you make good trades, you may eventually find yourself with more money to trade.