Pros & Cons of Broker Individual Stock

Know the risks and rewards of investing.

Investors in the stock market can buy and sell individual stocks, look for quality stock mutual funds or take a combination approach. Individual stocks and mutual funds have their pros and cons, and investors need to look at the benefits and drawbacks of each approach. Understanding the risks and rewards of single stock investing versus mutual funds is one way to make the most of your money.

Potential Appreciation

Stocks like Google and Microsoft have had incredible runs since they first went public, and many of those early investors saw excellent returns on their initial investments. It would be difficult to duplicate those kinds of returns with a diversified mutual fund, since the dilution factor would reduce the impact of those stellar performers. Of course, not every stock is Google or Microsoft, and there is no guarantee that an individual investor will be able to spot the next great stock ahead of time.

More Control

When you buy an individual stock, you know exactly what you own. You know what the company does, how long it has been in business and how it makes its money. If you feel you have good knowledge of the industry, you can evaluate how the company is doing compared with its peers. If the company does well and the stock appreciates in value, you stand to make a lot of money. If you choose a stock mutual fund instead, you are at the mercy of the fund manager when it comes to what you own. You can see a list of current holdings by reviewing the mutual fund's annual report, but there is no guarantee that the fund will continue to hold all of the stocks listed.

Higher Costs

Buying individual stocks means going through a broker, and that means incurring trading costs each time you buy and sell. You can reduce these trading costs by working with an online discount broker, but there is still a charge involved each time you make a transaction. If you choose to work with a no load mutual fund company instead, there is no charge to buy and sell your shares, and you can accumulate additional shares whenever you want without paying a commission or a brokerage fee.

More Risk

Buying individual stocks can be risky, and there is always a chance that the company you invest in will go out of business. In most cases the common stockholders get nothing in that case, meaning that you could lose all of your money. Diversifying your stock market holdings with a quality mutual fund greatly reduces the risk, since many stock mutual funds hold dozens, or even hundreds, of different stocks.

References

• Investing Toolkit: Pros and Cons of Picking Stocks
• CNN Money: Money 101 --- Stocks