A simple but crucial investment tip is to spread your investments. I've advised on this approach many times and believe in its importance. Investing in a low-cost index fund's broad stock selection is safer than investing in a few stocks. General Motors, Eastman Kodak, and GE all lost value, demonstrating the dangers of single-stock investing.

Beyond this well-known advice, individual stock analysis involves other essential factors. Although 52% of Americans invest in stocks, only 14% choose individual stocks. The majority choose stock mutual funds and ETFs.

Are individual stocks completely avoidable? Knowing how individual stocks affect your portfolio is essential to choosing a retirement plan, investment account, or robo-advisor. Some primary reasons why individual stocks are risky are complied in this read.

Your Earnings Will Likely Be Lower

Common belief suggests that investing in stocks is a fifty-fifty gamble: some stocks will outperform the market, while others won’t. However, this isn’t exactly true.

A 2020 study by Arizona State University revealed a surprising fact: almost all U.S. common stocks (96 percent) had returns comparable to one-month Treasury bills. This implies that only a few reserves significantly contribute to the stock market's performance. Consequently, past market leaders are not guaranteed to lead in the future.

Here’s something to consider: Investing in a handful of stocks might seem like a shortcut to wealth, especially if you pick the right ones. This method is risky, like playing the lottery. In most cases, the odds are against you winning the jackpot. This is highlighted by the unpredictability of stock recommendations, such as Jim Cramer's endorsement of Silicon Valley Bank shortly before its downfall.

Stock Spin-offs

When a big company, like GE, creates a new public company from one of its branches, it's called a stock spin-off. Think of it this way: GE recently turned its healthcare section into a separate company, GE HealthCare.

You're also dealing with GE HealthCare shares if you own GE shares. You must determine these shares' original value (cost basis). This value is split between GE and GE HealthCare.

If you bought your shares after 2011 and use a brokerage, they'll usually handle it. However, this split adds another layer of complexity to your individual stock analysis. When you sell these shares, remembering their initial worth can be tricky, yet crucial for accurate financial records.

Deciding on Rights Issues

Sometimes, companies offer their shareholders a chance to buy more shares, often at a lower price. This is called a rights issue. It's an invitation to buy more shares at a special price.

It can be complicated to decide whether to buy these extra shares or sell your rights to them. It requires a careful individual stock analysis. If many people believe these additional shares, the company will have more shares in circulation.

This can make your claims less valuable, assuming everything else stays the same. Exercising these rights means putting more money into the company. It's a decision that involves weighing the advantages of individual stocks against the potential individual stocks cons, like the risk of your shares losing value.

Proxy Voting in Publicly Traded Companies

As a shareholder in publicly traded companies, you're entitled to vote on important decisions at annual shareholder meetings. These decisions can range from selecting board members to approving company sales.

However, the reality is that many shareholders don't engage deeply in this process. The extensive documentation and detailed research required for informed voting can be overwhelming, particularly for those holding various stocks.

In contrast, when you invest through diversified, low-cost funds, the burden of decision-making is reduced. Fund families like iShares, Vanguard, Fidelity, and Schwab conduct the necessary research and represent shareholder interests, simplifying the process for advantages of individual stock investors.

Challenges with Individual Stock Diversification

When you consider owning individual stocks cons, it's essential to realize that achieving proper diversification is challenging. Experts often suggest holding between 30 and 100 different stocks to be well-diversified. Handling the purchase of this many stocks can become a cumbersome task.

Additionally, the cost factor cannot be ignored. Purchasing individual stocks cons can be expensive, especially if you're not opting for fractional shares. You should invest a significant amount, possibly tens of thousands, to acquire a single share of each necessary company for diversification purposes.

If your investment budget is limited, you'll likely buy stocks gradually. This approach leads to lower diversification in the initial stages, increasing your investment risk. Your portfolio might remain under-diversified until you accumulate sufficient funds, exposing it to higher market volatility.

Volatility of Individual Stocks

Investing in advantages of individual stocks introduces a higher risk level due to potential price fluctuations. For example, in February 2022, Meta Inc. (formerly Facebook) witnessed the most significant single-day market value drop in history. Its market cap plunged by $230 billion in a day following a reported decline in active users.

Such volatility means that if the chosen companies underperform, you risk substantial losses or quickly losing your entire investment. Owning shares in a company like Meta could cause you to lose over 30% of your investment in just one day.

Is It Wise to Invest in Individual Stocks?

Individual stock investing can be smart under certain conditions. If you have a robust and diverse investment portfolio and are comfortable with risk, allocating some funds to specific stocks may be beneficial. This approach works well when you have confidence in a company's future success.

Eric Croak, a certified financial planner at Croak Asset Management, advises that average investors can hold stocks, provided they're aware of the risks involved. If you're keen on researching companies and making predictions from various forecasts, individual stocks can offer high returns at low costs.

However, it's advisable not to invest much of your investment in a single company. Whether choosing advantages of individual stocks or opting for mutual funds or ETFs, spreading your investments is crucial.

Remember, any investment carries risk, and owning individual stocks cons increases the chance of significant losses, according to Croak.