The pros and cons of stock picking
In contrast to passively investing in index funds, stock picking is much more active, and involves knowing the market well. You need both the time to dedicate to reading market reports daily and a healthy appetite for risk, knowing that not all your picks can be successful.
Investing in individual stocks is a choice that is only for those who want to take on investing as a serious hobby or maybe even as a second career. Stock picking entails a lot of study. To become a great investor, you have to be willing to first invest considerable time to understand the market, the history of growth and decline across a number of industries, and to stay on top of reports from reputable trading firms.
However, if you’re eager to become a unicorn stock hunter, there’s the potential for greater returns than an S&P 500 index fund can offer. Experts advise against trying to time the market, since day-to-day outcomes tend to be unpredictable, but there’s room to spot an opportunity for buying low to potentially sell high. Moreover, individual stock buyers can get access to dividend-paying stocks, which you can either use to supplement income or reinvest for your retirement fund.
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Learn MoreHow to invest in individual stocks
Stock pickers use both fundamental analysis and technical analysis to make decisions and predictions about stock performance.
For fundamental analysis, annual reports, quarterly conference calls and other third-party reporting on companies help investors to understand not only growth and profitability, but also public sentiment and the potential for new products or lines of business that could increase a company’s value. This type of analysis also involves studying competitors in the market to understand a company’s place in a sector compared to similar players.
For technical analysis, you look for trends and patterns in the stock price itself. This involves historical trading data, including a stock's price and trading volume, and the ability to see patterns that others may miss. You might also look at the trends from competitor stocks to compare growth and decline in the industry as a whole.
When you’re just starting out, look for reports from reputable sources to help you get a handle on both these types of data. At this early stage, paying more for the right tools can be helpful as you learn.
Once you feel confident that you’ve done your research, you will want to decide on the right time to buy and how long to hold a stock in your portfolio. There’s no one-size-fits-all-answer here. Ask yourself questions about your time horizon, personal financial goals and risk tolerance. Remember that holding onto a company that’s reputable today doesn’t mean the stock price will rise forever.
It’s always good to remind yourself as an investor to keep your emotions in check. There will be times, such as right now, where the market is extremely volatile and can seemingly change at a moment’s notice. It may be challenging, but focusing on your long-term strategy can be helpful.
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