There are many advantages to buying stocks individually, through either a full-service broker or a discount broker, versus investing in managed products such as mutual funds. Buying individual stocks provides independence and the ability to choose how to diversify, in addition to allowing you option strategies to hedge your portfolio or boost overall returns.
Instead of investing in a basket of stocks that a fund manager chose, you can build your own portfolio by doing your own research and hand-picking the stocks that best match your investment objectives. You can eliminate the management fees and expense ratios ubiquitous to the mutual fund industry.
Diversification is the foundation to any successful investment strategy. By buying stocks individually, you can more easily identify sectors and industries and overweight or underweight them at your own whim. Holding a portfolio of seven to 15 stocks lets you take full advantage of diversification while capitalizing on positive stock movements.
When you buy stocks on an individual basis, it opens up a new investment category: options. "Covered call writing," when you sell a call on a stock you own, allows you to hedge your risk or increase returns. Buying "puts" is a way to hedge against downturns when you own a stock that you think will suffer in the short term but perform over the long term.
Owning individual stocks allows you to alter your portfolio at any time. You can slowly buy into stocks over time, thus reducing your risk as opposed to buying lump sums as with many mutual funds. Dividend-seeking investors can benefit from buying stocks in utility or telecommunication companies, which typically offer higher yields while still taking full advantage of capital gains.
- The Intelligent Investor; Benjamin Graham, et al.
- Fundamentals of Investments for Financial Planning; Walt J. Woerheide, et al.
- Stock quotes in the newspaper image by Chad McDermott from Fotolia.com