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How Do You Know What Stocks To Invest In?

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The first step to financial freedom is to save some of the money that you earn. The next step is to make some of that saved money go to work, by investing it into something.

To keep it short, the general consensus is that you invest in stocks that you are familiar with (ie. if you’re a pharmacist, you’ll know a thing or two about big drug companies). If you’re not confident in investing your hard-earned money in individual stocks just yet, then you should buy an ETF or mutual fund (more on this later in the post).

I’m sure you noticed the stock market getting super popular over the years as the hot-spot to invest and grow your wealth, and rightfully so. People have made a lot of their wealth by investing in the stock market.

Wealth being made

Buying stocks to build your wealth is great, but it’s easy to get confused with all the noise out there.

These are some of the most asked questions online for people wanting to start investing in the stock market. I hope they help you get some clarity, and start moving forward in your personal finance goals.

What are the pros and cons of buying individual stocks?

Let’s get right to it with a quick list, these are some of the most popular pros/cons that you’d want to know about.

Pros:

  • Higher possible returns than the average market
  • No yearly management fees like mutual funds

Cons:

  • Higher possible losses because individual stocks can be more volatile

To keep it simple, you’d want to go with buying individual stocks if you have a good understanding of that company, believe in what it does, and want to “vote” for it’s success.

For me, I have been a computer/internet fanatic since I was 13. I’ve seen the rise and fall of tech companies, and I can understand how some of them work.

I know how companies like Slack, Microsoft, Apple, and Adobe make their money. I can call their bluff, kinda see where the trends are headed, and get an idea if I should put some money down on these companies.

Someone passionate about not smoking would definitely not want to invest in a cigarette brand, see what I mean?

Should I just invest in ETFs and Mutual Funds?

You might choose the route of buying only ETF’s and/or mutual funds if you want to just keep investing for the future without thinking too much about what individual stocks you want to buy.

This is a great way for you if you don’t want to have the stress of seeing indivdiual stocks going rapidly up and down, and also don’t have the time to keep up with them.

Investing in ETF’s or mutual funds mean you can find one that suits your overall needs, and then just investing into it on a regular basis.

This will help you be consistent in your investing, and still get decent returns.

Can I buy both individual stocks AND invest in ETF’s and Mutual Funds?

Buying both stocks and mutual funds / ETFs

Absolutely, and this is what I would think most people should do. I myself try to keep it 60% ETFs and mutual funds, and 40% individual stocks.

Figure out your risk tolerance, from 1-10, and then use that number as your percent you’d invest into stocks. The rest go towards ETFs and mutual funds.

I don’t like risk, I’m a 4 on that scale, so I choose to invest only 40% of my money into individual stocks.

I do this so that I can use a bit of money to invest in individual companies that I know and trust, and can benefit from the much higher potential returns (or dead the much higher potential losses too).

How do I diversify so that I don’t lose all my money?

This is a great question, you can get really creative here. There’s no right way to do this, as everyone is different, so let’s brainstorm some ways right now.

  1. You could figure out your risk tolerance level like above (from 1-10) and then just split your investing money between individual stocks and mutual funds. (if you don’t like risk at all, you could do 90% mutual funds and 10% stocks).
  2. You could also diversify even more by either buying a mutual fund that has shares of the entire market (something like VIG) or buy several mutual funds that cover different industries like science, tech, financial, etc..

Wrapping up this popular question

I always want to end a post with an action step. You might want to go with option 1 or 2 below, based on your comfort level.

  1. You can invest in companies that you understand, because you’re either working in the industry and/or passionate about the company. You know what the future of this company might look like, and you’re willing to “vote” for this companies success by buying stock in it.
  2. You’re working on getting more comfortable in buying individual stocks, so for now you’ll keep your risk low by investing in ETFs and/or mutual funds. You get to have small pieces of ownership in lots of big and small companies.