Buying individual stocks means you’re buying a piece of a company. You’ll share in its success and, in equal measure, its struggles.
You can grow your wealth when these companies expand, increase revenue, or pay dividends. But if they struggle, your investment can take a hit too.
Unlike mutual funds or ETFs, where the risk is spread across many companies, individual stocks offer the potential for a higher return on investment but also come with greater uncertainty. This guide will look at some of the potential benefits, downsides, and smart strategies to help you invest wisely.
Understanding Individual Stocks
When you buy an individual stock, you own a piece of a company. This makes you a shareholder, meaning you own a part of that business relative to the number of shares you own out of the total available.
As a shareholder, you receive rights, such as the right to vote on company matters, the right to receive dividends if they’re declared, and the right to sell your shares when you want to. But just because you own stock doesn’t mean you have direct ownership of the company’s assets; you own your shares of stock.
Individual stocks are traded on exchanges such as the New York Stock Exchange (NYSE) and Nasdaq, which link buyers and sellers and set prices according to supply and demand.
On the NYSE, trades are conducted through brokers and market makers in a system that resembles an auction, while the Nasdaq operates solely online, matching trades through electronic networks. To qualify for listing on such exchanges, companies have to meet certain minimum standards, such as minimum stock price and market value.
Stock Classifications
With stocks, you get different categories, and each appeals to different investors.
Blue-chip stocks, for instance, refer to shares of large, financially stable companies with a good record. These tend to be more stable equities, often with dividend payments, meaning they’re a popular choice for reliability in investment.
If you’re looking for bigger gains, growth stocks may appeal to you. These are shares in companies expected to grow more quickly than the typical business.
These companies tend to reinvest their profits back into growing the business rather than pay dividends. They can return a ton of upside, but they can also be much more volatile, so you need to weigh the risks accordingly.
Dividend stocks pay regular distributions to shareholders, resulting in predictable income. Some blue-chip companies fall into this category, making them a solid choice for investors seeking both growth and income.
And then there are value stocks — shares that trade at a price below their true value. Investors purchase them on the premise that, in due course, the market will catch up to their fair value and the price will increase. It takes a patient investor, but these stocks can provide good returns over the long haul.
Why Investors Choose Individual Stocks
Individual stocks are preferred for their potential to generate higher returns. A single well-chosen stock can pay enormous dividends, unlike mutual funds or ETFs, which spread risk across multiple companies.
In addition to returns, owning individual stocks allows you more control over your portfolio. You can select the companies that fit your approach, whether you’re attracted to hot-button tech companies, stable blue-chip stocks, or contrarian picks. This do-it-yourself approach is attractive to investors who would rather make their own decisions than leave things up to fund managers.
Another major benefit of dividend stocks is steady, passive income. Regular dividend payout companies provide investors with cash flow that can be reinvested or used as additional income. Dividend-paying stocks are a good option for those who want to build wealth but also want financial flexibility.
Key Risks of Investing in Individual Stocks
Risks of investing in individual stocks include:
Market Volatility
Stock prices can swing wildly based on economic trends, earnings reports from companies, or even fluctuations in investor feelings. A robust jobs report, for instance, might send markets soaring one day, while surprise inflation data could lead to a steep drop the next. Such volatility can make individual stocks less stable than other forms of investing.
Company-Specific Risks
By investing in a single company, you take on risks directly linked to that business. Bad leadership choices, more competition in the field, or difficulties specific to the industry can all weigh on a stock’s fortunes. For example, a product recall or a scandal can send a company’s share price crashing down overnight.
Lack of Portfolio Diversification
The more stocks you own, the less exposed you are to losses if one or more of those companies does poorly. Diversified funds mitigate risk by spreading investment across a wide array of assets.
Tips for Investors Trading Individual Stocks
Putting money into individual stocks doesn’t have to be a gamble. When you do it right by making conscious decisions that are aligned with your vision, you can handle risks better.
Do Thorough Stock Trading Research
Do some digging into the company’s financial health and recent news before making a stock purchase. Research earnings reports, debt levels, and growth trends to keep speculation at bay. Knowing the numbers enables you to make better, more informed decisions.
Invest in Companies You Know
It’s easier to invest with confidence when you know how a business actually works. If you’ve used its products or services, for example, you might have a clearer sense of what it does well and where it struggles. Staying within industries you’re familiar with can minimize uncertainty and help you feel confident about your selections.
Use a Long-Term Perspective
The stock market has its highs and lows, and short-term fluctuations are completely irrelevant compared to long-term growth. Resist the temptation to react to daily fluctuations and instead stake your future on companies that are well-positioned to grow over years or even decades.
Set a Clear Exit Strategy
Set rules in advance for selling — whether that means securing profits after a stock has gained a certain amount or selling if a stock underperforms. A plan keeps your emotions under control so you make strategic rather than reactive moves.
Is Investing in Individual Stocks Right for You?
Before investing in individual stocks, you need to consider whether they’re right for your investment style and risk tolerance.
Risk Tolerance
Higher return potential stocks usually entail higher risk. Prices are capable of swinging widely depending on market trends, the performance of the company, or changes in the economy.
If you’re not comfortable with volatility or losing money on an investment over the short term, portfolio diversification involving ETFs or mutual funds may align better with your investing goals.
Time Commitment
Picking and managing individual stocks isn’t an investment strategy that allows you to set it and forget it. You need to research and track financial reports, keep up to date on market news, and know when to buy or sell. Passive investing may be better if you don’t have the desire or the time to monitor stocks regularly.
Investment Goals
Individual stocks tend to be better for long-term growth-reliant investors who can bear significant potential losses for higher overall returns. But if you care about stability and predictable income, dividend stocks or broader index funds may be a safer bet.
In the long run, a single stock provides a chance for a great return on investment but takes knowledge, patience, and a risk profile.
Trade Like a Pro With Gorilla Trades
Even the best investors require expert advice that helps them discover opportunities and mitigate risks. Tailored for the modern investor, Gorilla Trades eliminates the heavy lifting when selecting stocks by focusing on fast-growing companies with explosive potential. For beginners and seasoned investors alike, Gorilla Trades provides the tools needed to make confident, data-driven decisions. Sign up for a 30-day free trial today.
