This is a guest post from Hank Coleman who writes about money and investing on his blog, Money Q&A.
I am a huge fan of Dave Ramsey and write about his baby step program to financial freedom quite a bit on my blog, Money Q&A. one thing that always strikes a chord with me is that he is a big proponent of investing in mutual funds and not in individual stocks. There are several dangers and risks that investors take, especially new investors, when you invest in individual stocks instead of mutual funds. Here are some of the biggest dangers of investing in individual stocks.
You Don?t Have Enough Time ? Professional money managers have a full-time staff of college educated financial analysts who do nothing but research and track a few select stocks that they follow. Individual investors have to research stocks when you are done with your day job or on your lunch break. Professional stock analysts eat and breathe tracking stocks while you may only be able to devote a few hours a day to the task of following the companies you invest in.
You Are Not As Diversified ? Investing in mutual funds provides you with the ability to diversify your investments across a wide range of stocks, bonds, and other types of investments. A mutual fund can typically hold over 100 individual stocks inside the fund. While an individual investor may only be able to purchase ten or fewer stocks at any one time. You are subject to a rougher ride with the stock market when you only have a few stocks in your portfolio. A decline in one stock can often drag all the others in a small portfolio down with it when you only have a few in your basket. But, when you own a mutual fund that includes hundreds of different companies? stocks, one decline is typically offset by others? advances.
Higher Cost To Invest ? Typically, discount stock brokerage firms charge you $7 or more every time you trade stocks. This can start to add up to quite a large amount of money in commissions if you trade stocks often. It can also be a large hurdle to overcome if you are only buying a few shares of a company?s stock instead of a large block of shares or a whole 100 share lot. Mutual funds allow you to invest money in either a lump sum or systematically with little or no transaction costs.
It Is Hard To Dollar Cost Average ? Unless you are using a dividend reinvestment plan (DRIP), it is often hard to buy small amounts of shares of individual stocks each month using dollar cost averaging. This is not the case if you are investing in mutual funds. Mutual funds typically make it very easy for all investors to set up automatic payments to purchase new shares of the mutual fund at set intervals which lends itself perfectly to dollar cost averaging.
Far too many people only think about investing in individual stocks when investing first comes to mind. Mutual funds tend to be an afterthought if thought of at all, but this is a mistake. Mutual funds provide new and intermediate level investors excellent advantages over investing in individual stocks. There are time consuming potential dangers that should not be overlooked in individual stock investing. Often it is more beneficial to start investing in mutual funds and slowly branch out to individual stocks with a small portion of your total portfolio as you become a more seasoned investor.
Hank Coleman is a finance writer who has written extensively for many financial websites and publications in addition to his own blog, Money Q&A. Hank holds a Master?s Degree in Finance and is currently studying to take the Certified Financial Planner exam later this year. Be sure to follow him on Twitter @MoneyQandA.
Source: http://www.fiscalphoenix.com/the-dangers-of-investing-in-individual-stocks-a-guest-post/
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