Do you invest in single stocks? If not, do you see yourself owning shares of a company one day? I think it’s a question a lot of people have. Very similar to my recent post about moving into taxable investing. However, this question relates more to the type of investment vs the investment vehicle. Most of us are in stocks via our mutual funds, target date funds, and index funds. But how many are into single stocks as well?
Reasons to Own Single Stocks
Why would you even want to own single stocks? We now have all types of investment options (target-date funds, mutual funds, index funds, etc.) that are designed to remove the risks involved with single stocks. So why would anyone want to own single stocks?
To clarify, I’m not referring to owning 1 share of something. By single stock I mean, x number of shares of one company’s stock (i.e. 100 shares of Google: GOOG).
There are a few reasons single stocks make sense for some people:
1. Company Stock – If you work for a company, you may have been given shares or options to buy shares of your company’s stock. This is great. And it’s excellent that the company wants you to own and invest in part of the business. If you’re lucky enough to own shares through a company stock purchase plan, I’d encourage you to explore ESPP flipping.
2. For Fun – Investing in mutual funds is about as exciting as watching paint dry. I talk a lot about maxing out your retirement accounts and starting up Roth IRAs. And I can see the collective eyes glazing over each time I do. I get it. It’s not exciting. That’s why I think some people turn to single stock investing. They see it as a way to do some real, hands-on, “stuff I can wrap my head around” investing. For instance, owning a share of Blockbuster stock is fun because you can walk into the store and use their service. You can invest your dollars in the company you own part of. Fun.
3. You’re Comfortable with the Risk – Another reason to invest in single stocks is because you’re comfortable with high risk. I’m not a risky guy. Single stocks aren’t for me. But I know there are plenty of 20, 30, and 40 year olds with cash out the wazoo who are looking to gamble on some companies. Nothing wrong with that if you’re fine with the risk.
4. You Can Create Your Own Allocation – Some people actually have the investing savvy to set up proper asset allocation with their portfolio using nothing but single stocks. These people are able to achieve with 50 stocks, for instance, what you are getting with your mutual fund. If you are the type that can set this up and actively manage your stocks, then go for it.
5. Dividend and Strategy Investing – I don’t know much about this topic, but I do know that some people like to invest in single stocks because of the dividends they produce. Or they use some other investment strategy that leverages the power of singles stocks. It’s my goal to know more about these strategies in the coming year.
Risks Involved with Single Stock Investing
As I alluded to above, there are some risks involved with single stock investing. The primary risk (compared to other investment choices) is that you aren’t able to easily achieve proper asset allocation (i.e. you have all your eggs in one basket). If the company you are invested in goes bankrupt, the stock price will tank, and you will lose your money.
Limit Your Single Stock Investing
Because of the risks involved with single stock investing, it’s often recommended that you keep your single stock ownership to around 10% of your entire investment portfolio. I pretty much agree with this philosophy. But I’m a very risk averse guy, and the primary reason I invest is to save for retirement. I don’t consider myself savvy enough to beat the market with my picks. Maybe one day I will be though.
Where to Buy Stocks
The best place to buy single stocks if you’re going to be actively trading them is at one of the best online stock brokers. These companies allow you to move your money around in and out of stocks with little or no fees. You don’t want expensive trading fees to cut into your single stock profits.