Stocks are essentially a financial tool that represents ownership of specific quotes of a company. When a company decides to enter the stock market (we are talking generally about big enterprises), it does it by selling small quotes of ownership to potential investors: in this way, it is possible to gain capital it can be used to grow and realize new investments. Moreover, it is not uncommon to find companies that offer stocks of different kinds: those for people who just want to invest and those giving more or less power of decision during annual shareholder meetings. In this way, it is also possible to sell stocks with low power rights of voting on the market and to retain the stocks with the biggest power of decision so that a company founder can basically maintain the control of every corporate aspect even while selling pieces of ownership to several other investors: this is what happens, for example, with Alphabet stocks (those related to Google services), as they are sold in different kinds, each one with different power of voting. Stocks not only represent ownership of a part of a company: they are also entitling their owners to perks like dividend distribution, plus, they constantly vary in price, so that you can find yourself buying a stock at a certain price and selling it at a higher or lower price. Of course, stocks are an investment due to the ability to gain value from their purchase, still, they are a very risky way to invest money for people without experience. Here, some reasons why you should think twice before picking individual stocks if you don’t have enough experience.
The emotional impact of owning a stock
As purchasing stocks doesn’t just mean investing our money somewhere, but also acquiring a small participation inside a company, it is easy to let dominate our emotions when it comes to make this kind of investment, instead of just thinking rationally what are the best things to do. Someone with no much experience may be tempted to just buy stocks of companies they like for some reasons, without enough research on the true potentials of their choice. Buying Apple stocks just because you are a tech addicted to their products or Starbucks ones just because you drink their coffee everyday is not exactly the smartest way to make an investment. Choosing them after having evaluated company history, their good and bad performances on the stock market in the past, the alternatives and the final reason why you are purchasing them (which can be the idea of selling them later at a higher price or of keeping them in order to gain dividends) is a different story. That’s the reason why it is not a good idea to pick individual stocks unless you have gained enough expertise: emotions may influence a rational decision. Another example of how emotions may be dangerous for our investments is when difficult situations like pandemics or wars are happening: it is perfectly normal that stocks performances may be influenced by politic or social issues, still, emotions may make people afraid of their choice so that they may be tempted to sell the stocks during the negative periods, instead of waiting for better times.
Commissions can eat your earnings
When purchasing stocks with our bank as the intermediary, without considering alternatives like CFD investment through an external broker, we are commonly paying commissions whenever we open and close our position. That’s mean that, if your bank charges €8 for a transaction, buying and later selling stocks of a specific company can cost you €16 in total. It is clear that losing our money because they get eaten by the commissions applied by our bank can be very easy, especially if we invest small amounts of money and we don’t calculate how much a stock should gain in order to earn something in return by considering also the commissions. If you are used to invest small amounts of money and don’t want to choose riskier alternatives to buying stocks from your bank (like opening brokerage accounts for CFD purchasing, often without knowing much about the broker we are going to choose), maybe you shouldn’t pick individual stocks and buy them.
The alternative to pick individual stocks
If you have realized that your profits are not high due to the commissions you are paying for opening and closing your positions multiple times, you are easy to be taken by your emotions and you are simply not sure you can afford the responsibility of picking individual stocks you think will make a good profit for your investment strategy, there is surely a good alternative: investing in mutual funds or, even better, in ETFs: they are both groups of stocks (they can also feature bonds and other financial tools, so that they may offer even more variety if compared to individual stock picking) managed by professionals, with only a difference: the first ones are constantly managed and new stocks are constantly purchased and other ones are sold, while ETFs tend to merely replicate a specific category of stocks or index, with very little management. ETFs tend so to be generally cheaper if compared to mutual funds in terms of commissions, still, there is no perfect investment opportunity: that’s why you should carefully evaluate all the possibilities you have, including picking individual stocks by yourself, if you are really sure you know what you are doing.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.