Investing in individual stocks can significantly complicate the investment process. This is why personal finance experts recommend buying and holding low-cost index funds., who track the entire market (or part of it), not individual companies, providing an easy way to diversify your portfolio.
For this reason, individual stocks should have a smaller share in the investment portfolio.. “I recommend investing 80% your portfolio to index funds and 20% in individual stocks as a starting point for your overall investment ", – says Maggie Gomez, certified specialist financial planner and financial coach from Florida.
To start adding individual stocks to your portfolio, you should research them and pay attention to the recommendations and advice of experts.
Firstly, it is important to know the different types of stocks. Usually, when people talk about promotions, they mean blue chips, that is, those, which are sold in large, reputable companies – Google, Amazon, Yandex, Sberbank, etc.. But you shouldn't be limited only to big names., shares of smaller or newer companies can also constitute a significant part of a balanced investment portfolio, provided, that the investor has carefully assessed the risks and conducted research.
Investors can classify stocks into one of four groups, explains Adam Lynch, Senior Quantitative Analyst, Schwab Equity Holdings. There are big cap growth stocks, small cap growth stocks, low-cap stocks and value stocks. “Knowing these terms will help you understand, what's happening", – Lynch notes.
Each group presents different levels of risk. Large cap stocks are usually associated with companies worth more than 10 billion dollars. Small caps are calculated as companies, whose shares on the market are worth from 300 million to 2 billion dollars. Growth stocks come from companies, showing profits and potential above average. Valuable shares – these are those shares, which are traded at a lower price, what could be worth, what signals investors about the possible conclusion of a profitable deal.
Other factors, to consider when researching stocks, include the industry direction of the company, are dividends paid on shares, the total market value of a specific company's stock (known as market capitalization). Investors should aim for a diversified portfolio, representing a range of industries (such, as energy, materials, banking and basic consumer goods). Likewise, it is best to include a percentage of the shares in the investment portfolio., on which dividends are paid, as well as a good mix of large and small market cap stocks.