If you're looking to invest in the stock market, you have a number of options for how to place your money. You can put all the money you wish to invest in a single stock, you can build a portfolio of several stocks or you can put the money into a fund that invests in stocks on your behalf. Buying individual stocks can be a good way to make money if the companies you invest in do well, but it can carry more risk if those companies don't do as well as you expect.
How the Stock Market Works
Stocks represent a stake of ownership in a company that you can buy and sell as an investment. Anyone can buy and sell stock by working with a stock brokerage or, in some cases, directly through the company that issued the stock.
Investors will typically buy stock in companies expecting the stock price to rise as the company does well so that they can sell their holdings when the price has risen. They can also make money when companies issue dividends, which share some of the company's earnings with the shareholders in proportion to how much stock they own.
Stock brokerages typically charge commissions, or fees, when you buy and sell stock. They typically charge the same amount no matter how many shares of the company you buy or sell in one transaction. That can make it more advantageous to buy and sell more shares at a time, although some brokerages now offer commission-free trades. Shop around for one that offers services you like at fees that make sense for your needs.
Single Stocks Advantages
Buying single stocks by definition exposes you to the risk and reward involved with the companies that issued them. If you pick stocks well, and the companies you pick go up in value, you can potentially make a good deal of money.
Picking single stocks also enables you to focus your investment decisions on a few companies, although you'll likely still also want to keep an eye on market trends as a whole. Read the reports the companies file with regulators like the Securities and Exchange Commission and consult analyst reports and news media about the companies in question.
Buying and selling individual stocks may also incur fewer fees than other types of investments, such as investing in mutual funds. They're also only taxed when you sell them or when you receive dividends, which can be an advantage compared to investing in real estate, which is subject to property tax as long as you own it.
Alternatives to Buying Single Stocks
Rather than buying single stocks, you can invest in a mutual fund or index fund that invests in stocks. Typically, traditional mutual funds employ human experts to make decisions about what companies to invest in, while index funds automatically invest in companies that are on a particular market index or meet some other criteria. Index funds usually charge lower fees than traditional mutual funds.
You can invest in mutual funds through the companies that run them or through a brokerage. Many index funds are exchange-traded funds, meaning that you can buy and sell shares in them as you would in individual stocks using a broker of your choice.
You can also invest in the bond market rather than the stock market. Bonds are issued by companies and government agencies as a way to borrow money, and pay back interest over their lifetimes. They're often seen as less risky than stocks, but a disadvantage of bonds is that they can't deliver outsized returns if a company does well the way that stocks can. Some government bonds also offer tax advantages that you should factor in when deciding how to invest your money.
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.