Should You Invest In Individual Stocks?

Since you’re reading a blog called My University Money, I’m going to assume that you’re in your 20s, have some sort of career, probably are fresh out of university or college and have a bit of disposable income, even after making the payments on your student loans. Whoa, I just peered into your soul a little bit there, didn’t I?

What’s that? You’re a 34 year old who works a blue collar job, without any post secondary education and you’re student loan free? Well, in my defense, I’ve never met you. The good news is most of you will be able to relate to this post, no matter your age, education level or indebtedness. We’re going to talk about investing.

That sound you hear is everybody clicking the back button simultaneously. Wait! Don’t go! I promise, it’s possible to read about investing and to be entertained at the same time.

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For the purposes of our discussion, let’s divide investing into two categories, passive investing and active investing. Passive investing, as you’ve probably figured out, is investing via mutual funds or exchange traded funds. All you do is buy a basket of stocks, a basket that either a professional manager chooses or a basket that attempts to track a certain index. (like the TSX Composite or the S&P 500) Active investing, meanwhile, is picking individual stocks to put in your portfolio. Knowing your interests (remember when I peered into your soul?) I know you’ll want to put all your money into MGM Grand, WWE, Budweiser and Philip Morris. Sounds like a fun time!

Should you be buying individual stocks? Of course you should, assuming that’s something that interests you. If you view investing as a chore, you should probably be sticking to passive investing. Why spend more time than you have to on something you don’t like? Before you go out and open several online brokerage accounts though, let me offer a few tips to increase your chances of being a successful active investor.

Learn To Real Financials

Unless you’re a real loser intellectual type, the idea of learning all about financial statements isn’t going to be on the top of your to-do list. Have you looked at a balance sheet lately? It’s boring! There’s no pictures or any dirty words. There’s only a bunch of numbers that look all complicated. How is anybody supposed to garner any information from it?

Wait, there’s two more financial statements? The cash flow statement and the income statement? This active investing stuff is tough.

There’s all sorts of information an investor can garner from looking at the financials. There’s basic stuff like whether the company actually makes money, how much debt they have, and how much they’re paying out for a dividend. This stuff is important to know if you’re going to be plunking cash on some shares.

It gets even more complicated. There are literally hundreds of financial ratios, and there are people who do nothing but look at financial statements all day long. (And get paid quite well to, assuming they know what they’re doing) There are financial ratios that I’m still convinced are made up.

Nobody is expecting you to get to that level of knowledge. But, until you can read financial statements, you shouldn’t be putting capital at danger investing in individual stocks. You can still lose money even after learning the basics of financial statements, but you’ll increase your chances of actually making money.

Expand Your Horizons

One mistake rookie investors make is investing only in companies they’ve heard of. They own a Mac, an iPhone and an iPod, all products they love. So what do they do? They run out and buy shares of Apple, simply because they love the company. Financials? Who cares!

There are approximately 8000 different individual stocks that trade on North American exchanges. You’ve probably heard of 250 of those companies, most of which market directly to consumers. By doing a little research, you can discover stocks that have attractive financials or attractive business prospects that everybody hasn’t already heard of.

You can also use your professional knowledge to help your investing. Say you work in the oilfield, like so many young men in my neck of the woods. If you combine your knowledge of oil companies operations with your knowledge of financial statements, you can maybe translate that into a successful investment.

Don’t Go Nuts

If you do end up investing in individual stocks, do yourself a favor and diversify your holdings. Sticking all of your cash into one stock is a bad idea, no matter how confident you are in it.

In fact, I’d recommend you keep the majority of your cash in passive investments (preferably ones with low management fees) and just dabble in active investing. That way you can learn about investing, have a little skin in the game, but not be wiped out if you pick the wrong stock. You will lose money at some point if you’re an active investor, but diversification will minimize that loss.

Do any readers have experience investing in individual stocks? Feel free to share with us.

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I own individual stocks, mutual funds and bonds. In addition, I own realestate beside my home. I think you should invest in a variety of investments based on an asset allocation and risk assessment. No single stock makes up more than 5% of my portfolio. In some cases much less.

I think it depends on which stocks they are and what kind of plans you have. I definitely wouldn’t have a portfolio full of just individual stocks, but a small percentage sounds okay. :-)

You are obviously not the “average” investor though either right KC?

Right now I own a mutual fund and an ETF, but active investing interests me a lot. I just don’t want to use lots of money buying each stock (trade commissions) so I buy an ETF so I am diversified with one purchase. As I start to gain capital I will be buying more individual stocks.

My 15 year old and a group of his friends have recently started playing a virtual stock market game. He did exactly what you said — “bought” stock in the companies that he is familiar with. He was very pleased today because he made $44. It’s going to be interesting to see what happens over the course of time and what his reaction will be.

At least with discount brokerages you don’t need a super high capital level if you believe active investing is going to be your thing.

At the very least your son is learning to be a capitalist! This is invaluable, congrats on making financial literacy a priority in your house. Just out of curiosity, what stocks did your son invest in (interesting to me from an investment psychology standpoint).

Ramona

Don’t forget another demographic – parent of a university/college attendee. I like to check in & read your posts too!

Good stuff Ramona, glad to hear we are appealing to a wide base.

Let’s see if I remember the details….he and his friends formed a team. Each team member got to invest $100,000. My son bought Apple and Coca Cola and I think one or two more. I’ll ask him this evening and let you know.

My husband and I talk about this a lot. Eventually we will buy some individual stocks but not until our portfolio is larger. Right now we are buying index funds as a way to build up our investments and stay diversified.

I do have some individual stocks as well as mutual funds and real estate just like krantcents.

At what point do you think it makes sense for you to go with individual stocks Miss T? I’ve heard the 50K in investments figure thrown around before.

Those are some pretty good picks! You should throw them up against some of the stock picking contests you see online. I bet it would show how little experience has to do with getting returns in the stock market.

There isn’t any one concrete definition of what is passive investing and what isn’t, but many of the definitions don’t include mutual funds with active management. The thinking is that you can try to focus on fees and asset allocation, just buying the index (passive), or you can try to beat it in some fashion (active): whether that’s on your own with individual stock picks, or by picking a manager who then makes individual stock picks.

2012 is going to be an exciting year. With extra money from my blogs, I plan to finally invest a little in individual stocks. I like you advice about just testing the waters before jumping in. I think that’s a great idea because it keeps it a positive experience.

I’m definitely going to be keeping tabs on your progress Corey! I like your “go get’em” style.

Nice post.

I think most investors are best off in a basket of broad-market indexed ETFs. A handful is all you ever need to own. Buy ’em and keep them for decades.

As you become more comfortable with investing, keep the ETFs and start holding directly, a few dividend-paying blue-chip stocks. Buy and hold unless they cut their dividend.

I think it can be that easy :)

Yet somehow we manage to make it so hard… amazing.

For new investors I would prefer buying exchange traded funds instead of individual stocks.

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