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Should You Ever Invest In Individual Stocks?

By: Jason Markum

I get asked this question all the time, its one of the most frequently asked questions I see. I get it especially from new people who have never invested in the stock market before and don’t know much about it.

Before we get any further along, I should mention as a disclaimer that I am not a certified financial planner or stock broker in any way shape or form. I did get a degree in economics back in college, but I am not a working banker either.

So, should you ever invest in individual stocks? The answer is a resounding NO!

The reason is no for several reasons. The first is common sense. You don’t know what you are doing. You don’t know how to properly analyze a company stock, and you don’t have the time needed to continually update that analysis each and every day as new information becomes available. Is someone suing the company? You don’t know. Did their latest product bomb in all the test marketing? You don’t know.

The second is more technical and deals with diversifiable risk. Mathematically speaking we can prove that buying many different companies in many different industries diversifies away one of the two main “risks” involved in investing. I won’t get into those two main areas of “risk” but just trust me when I say that the more companies you buy, the lower the risk becomes mathematically.

You can read up on market risk (beta) and individual company risk in any financial text book, just look up the Capital Asset Pricing Model or CAPM or Beta or market variance and you will get all you want to know including the math behind it if you have a skill in math.

The point is, you can diversify away some risk by buying more stock. Of course, you can’t individually buy many different stocks because it becomes prohibitively expensive in stock broker fees (which is WHY your local stock broker WILL suggest you buy individual stocks!).

What’s the solution? It’s actually quite easy. You buy shares in a stock market index fund like the S&P 500 or others that reflect the entire market as a whole. You can’t buy a share of every company in the stock market in order to diversify the risk away, but a mutual fund can!

What’s more, some mutual funds will let you set up your account to direct deposit a certain amount into your account each month, with which they will buy more shares of the index fund for you often at no additional stock brokerage fee.

Compare that to having to pay your stock broker every time he buys a share of stock for you and you quickly see how much money you can save year in and year out (hundreds of dollars or more!).

Vanguard is a good mutual fund type company that can help you out with this. They are reputable and experienced with helping out new investors who might not know exactly what they’re doing. Just tell them that you want a broad stock market index fund like an S&P 500 index fund that you want to invest a little bit in each month.

They will take it from there! (and no, I have no affiliation with them whatsoever)

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