Why Is Investing In Single Stocks a Bad Idea?

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A laptop, a phone and a magnifying glass in a white surface and a calculator in hands - Why Is Investing In Single Stocks a Bad Idea?

When you’re looking to invest your hard-earned money, you need to dive deep into understanding what avenues are the best for you. Often if you’re unhappy and knowledgeable about the stock market, you may look at single stocks as a viable option.

But are single stocks a good idea for a profitable portfolio where you should focus on mutual funds and ETFs? Most experts will suggest that there are plenty of things to consider when looking at this option.

But, of course, everything from your portfolio to your tax planning must be considered before you invest any type of money.

If you’re looking for the biggest return on your investment, focusing on one single stock could be a bad idea rather than diversifying, and allowing a combination of assets could potentially make your portfolio more successful.

When it comes to this, you need to be well-versed in all pieces of information. That’s why we thought we’d put together a quick guide on whether buying a single stock is good or bad.

Hopefully, with the knowledge we impart, we’ll be able to make an educated decision that is right for you and your portfolio.


Is It Worth Buying a Single Stock?

There are some advantages to buying a single stock. The advantages are key when you are looking to determine whether it’s the right option for your understanding.

When you’re dealing with an individual stock, you’re going to see reduced fees. That means you don’t have to pay the company management fee for your investments.

Along with the reduced fees investing in a single star means you know exactly what you have. However, oftentimes when you do mutual funds or ETFs, it’s an amalgamation of different stocks, and you may not completely understand what you own.

In regards to taxes, individual stocks are easier to handle. Because you’re in charge of when you sell and everything, you can control many of the gains and losses that come when dealing with taxes.


What is the Disadvantage of Single Stocks?

Along with understanding the advantages when you’re deciding whether going with a single stock option is a good choice, you should also understand the disadvantages.

Buying single stocks makes it very difficult to diversify your portfolio. Whereas if you are investing in mutual funds or ETFs, you are automatically diversifying because you’re buying multiple stocks at the same time.

The lack of diversity can result in less return on your investment. Along with that, single stocks often tend to be more time-consuming because you have to monitor everything in your portfolio more acutely.

This is because you don’t have a management company managing your funds. Instead, you are the person in charge of managing your portfolio.

Lastly, the biggest disadvantage is that oftentimes emotions get involved. When you are the sole manager of your portfolio and handling single stocks, you may find yourself reacting to the market in a more emotionally driven way.

This, in the end, could create more opportunities for loss.


How Many Stocks Should You Own As a Beginner?

If you’re someone who’s just starting, stocks can be very overwhelming. Understanding how to read markets, buy, sell, and trade can be frustrating and exciting. But as a beginner, the biggest thing to understand is where you should start.

When you talk to experts, they typically tell beginners that they should buy anywhere between 10 and 15 different types of stocks.

This allows their portfolio to start with a diversified spread of options. This is especially true if they’re dealing with brokers because, at this point, there’s no charge in commissions for online stocks and trades.


Are There Any Pros to Having Single Stocks?

As we mentioned above, there are many advantages to single stocks. But one of the advantages we didn’t touch on was the liquidity of single stocks.

With mutual funds and ETFs, trading and selling can be kind of challenging, and that is why you hand over the reins to a portfolio manager.

With stocks, though, they can easily be bought and sold on exchanges. This gives investors the ability to be flexible and have access to liquid assets at a moment’s notice. That can be quite an advantage, especially if you’re looking to make a quick return on your investment.


How Many Stocks Does an Average Investor Own?

Every investment manager or portfolio advisor will suggest you be diversified when it comes to your portfolio.

Of course, what that diversification looks like depends on what you have to invest, but most average portfolios that are successful in accruing high results on returns typically hold between 20 and 30 stocks.

However, the amount of stocks that you have in your portfolio depends on your funds and what you’re looking to achieve. For beginners starting with 10 to 15 stocks is enough, and then as you gain experience, you can then move on to more stocks.

If you are using a portfolio management company, the sky’s the limit because you are no longer chiefly responsible for monitoring the stocks and bonds.


Final Thoughts on Why is Investing In Single Stocks a Bad Idea

Like any investment, single stocks are riddled with advantages and disadvantages. In the end, whether single stocks are a bad idea or not is really up to the type of portfolio you are trying to build and how you want to invest your money.

Single stocks offer quicker liquidity and fewer fees, but they also leave you with an undiversified portfolio which could result in fewer returns on your investment. So the decision is really up to you.