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The Advantages of Buying Individual Stocks

Original post by Slav Fedorov of Demand Media

Compared to other investments, stocks have historically provided the best returns to the largest number of people. Investors can buy stocks through mutual funds, exchange-traded funds (ETFs), retirement plans and even annuities. But individual stocks, while riskier, can produce significantly higher returns.

Stock Selection

The performance of individual stocks can be markedly different from market averages. While the market can be up 10 percent for the year, stock A may be up 500 percent and stock B can be down 50 percent. A good stock selection method gives an investor the opportunity to significantly outperform the market by concentrating his capital in stock A while avoiding the pitfalls of stock B.

Timing

Most stocks move with the general market, but within those moves leaders take turns: one leading stock may be staging a powerful advance while another is basing or consolidating. An investor can buy individual stocks at the beginning of an advance and sell them when they begin to base or consolidate, always keeping his money working for him.

Concentration

By buying individual stocks, an investor can concentrate his capital in the best performers. Holding more than 20 stocks in a portfolio does not add protection, but may dilute performance. An investor can put together a concentrated portfolio of the 10 to 20 leading stocks with superior return potential and still be adequately diversified against downside risks.

Flexibility and Selectivity

Some markets produce dozens of leading stocks, others -- just a handful. A stock investor can respond to changing market conditions by varying the number of stocks in his portfolio to focus on the most promising areas of the moment while staying out of trouble. An investor who buys and sells shares in a mutual fund or an ETF in response to changing market conditions always makes all-or-none decisions: by buying and selling fund shares, he buys and sells all the stocks in the portfolio, good and bad.

Control

An investor who buys individual stocks knows exactly what he gets and why. A fund investor can only go by a fund's past performance and holdings and may not really know what he currently owns or why. A fund may trade daily but is only required to report its holdings monthly or quarterly. Some funds engage in "window dressing" -- buying the leading and selling the losing stocks right before reporting. This may make a fund manager look good but does not do much for the fund's performance or investor returns.

                   

References

  • "The Battle for Investment Survival"; Gerald M. Loeb; 2009
  • "How to Make Money in Stocks"; William O'Neil; 2009
  • "Stan Weinstein's Secrets from profiting in Bull and Bear Markets"; Stan Weinstein; 1988

About the Author

Based in San Diego, Slav Fedorov started writing for online publications in 2007, specializing in stock trading. He has worked in financial services for more than 20 years, serving as a banker, financial planner and stockbroker. Now working as a professional trader, Fedorov is also the founder of a stock-picking company.

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