Is It Worth Buying a Single Stock? The Complete Guide for New Investors

The Single Stock Dilemma: Smart Investment or Unnecessary Risk?

Have you ever found yourself staring at your phone, thumb hovering over the “buy” button for that one hot stock everyone’s talking about? Maybe it’s Apple, Tesla, or some buzzy new tech company your friend swears is “going to the moon.” I know I’ve been there!

The question that keeps many would-be investors up at night is simple is it worth buying a single stock?

The answer, like most things in investing, isn’t straightforward It depends on your financial goals, risk tolerance, and how much time you’re willing to dedicate to monitoring your investments.

In this article, I’ll walk you through everything you need to know about investing in individual stocks versus diversified options like mutual funds and ETFs. We’ll examine the pros and cons, look at modern portfolio theory, and help you make an informed decision that’s right for YOUR investment journey.

Understanding Single Stocks vs. Diversified Investments

Before diving into whether single stocks are worth your hard-earned money, let’s clarify what we’re talking about:

• Single stocks: Ownership shares in one specific company
• Mutual funds: Professionally managed investment pools that own many stocks
• Exchange-Traded Funds (ETFs): Similar to mutual funds but trade like stocks throughout the day

When deciding between these options, modern portfolio theory comes into play. This investment approach focuses on maximizing your returns without taking on unnecessary risk. The theory suggests there’s a sweet spot where combining different investments minimizes risk while maximizing potential returns.

How does this work? By diversifying your unsystematic risk (the risk related to one specific stock) through buying assets with low correlation to each other. When one investment zigs, others zag, creating a more stable overall portfolio.

The Upside: Benefits of Buying Individual Stocks

1. Lower Fees Over Time

One of the most compelling reasons to buy individual stocks is cost efficiency, When you purchase shares directly

• You pay a fee when buying and another when selling
• No annual management fees like those charged by fund companies
• The longer you hold the stock, the lower your ownership cost becomes

Since investment fees can seriously eat into your returns over time, this advantage shouldn’t be overlooked!

2. Complete Transparency and Control

With single stocks, you know exactly what you own. There’s no mystery about where your money is going or what companies you’re supporting.

You decide:

• Which companies to invest in
• When to buy shares
• When to sell shares

This level of control appeals to many investors who want to align their portfolios with their personal values or market insights.

3. More Efficient Tax Management

Managing taxes becomes simpler with individual stocks. YOU control when to sell, which means you decide when to realize gains or losses.

With mutual funds, the fund manager makes those decisions, and you’re assigned your portion of the gains regardless of when you bought in. This can lead to unwelcome tax surprises, especially if you purchase a fund late in the year just before distributions.

The Downside: Challenges of Individual Stock Investing

1. Diversification Difficulties

The biggest hurdle for single-stock investors is achieving proper diversification. Research suggests you need between 20 and 100 different stocks to be adequately diversified.

This creates several challenges:

• Requires significant capital to properly spread across many companies
• Difficult for beginning investors with limited funds
• Increases your portfolio’s unsystematic risk if you can’t afford many different stocks

Remember, proper diversification is about more than just quantity—you need stocks across different sectors, company sizes, and geographic regions.

2. Time Commitment

When you buy individual stocks, YOU become the portfolio manager. This means:

• Regularly monitoring company performance
• Keeping up with industry trends
• Following economic news that might impact your investments
• Researching financial statements and earnings reports

Be honest with yourself: do you have the time, knowledge and interest to do this properly? Many successful investors dedicate hours weekly to portfolio management.

3. Emotional Decision-Making

We humans are emotional creatures, and that can be dangerous for investing. With individual stocks:

• Market volatility becomes more personal
• Fear might push you to sell during downturns (locking in losses)
• Greed could tempt you to chase hot tips without proper research
• You might hold losing positions too long hoping for recovery

These emotional reactions can lead to impulsive trading, increasing fees and potentially damaging your returns.

Finding Middle Ground: Hybrid Approaches

You don’t have to choose between ONLY stocks or ONLY funds. Many successful investors use hybrid approaches:

1. Core and Satellite: Keep 70-80% of your portfolio in diversified funds (the core) while experimenting with individual stocks using the remaining 20-30% (satellites).

2. Build Gradually: Start with broad-market ETFs, then add individual stocks as your knowledge and capital grow.

3. Sector Concentration: Use funds for broad market exposure but select individual stocks in sectors where you have specialized knowledge.

These approaches can give you some of the benefits of both worlds while mitigating the drawbacks.

Is Single Stock Investing Right for You? Ask Yourself These Questions

To determine if individual stocks make sense in your portfolio, consider these factors:

1. Investment Knowledge: Do you understand financial statements, valuation metrics, and industry analysis?

2. Available Capital: Can you afford to buy enough different stocks to achieve diversification?

3. Time Availability: How many hours weekly can you dedicate to research and monitoring?

4. Emotional Temperament: Are you disciplined enough to avoid panic selling or impulsive buying?

5. Financial Goals: Are you investing for long-term growth, income generation, or short-term gains?

6. Tax Situation: Would tax-loss harvesting and careful gain planning benefit your personal situation?

Be brutally honest with yourself when answering these questions!

Best Practices for Single Stock Investors

If you decide that individual stocks do have a place in your portfolio, follow these best practices:

Start Small

Don’t go all-in on individual stocks right away. Begin with a small portion of your investment capital while you learn the ropes.

Do Your Homework

Before buying any stock:

• Read the company’s annual report
• Understand their business model and competitive advantages
• Analyze their financial health
• Consider management quality and track record

Set Clear Rules

Establish guidelines for buying and selling before emotions come into play:

• Maximum percentage of portfolio in any single stock
• Price or performance triggers for selling
• Regular portfolio review schedule

Stay Diversified

Even within your stock portfolio, aim for diversification across:

• Different sectors (technology, healthcare, consumer goods, etc.)
• Company sizes (large, mid, and small cap)
• Geographic regions (domestic and international)

Keep Costs Low

Use a low-cost broker and trade infrequently to minimize expenses.

Real-World Example: The Single Stock Disaster

My cousin Jake learned about single stock risks the hard way. In 2021, he put 75% of his savings into a popular tech stock that everyone swore was “the next big thing.” The company looked promising with cool products and growing revenues.

When the tech sector crashed in 2022, the stock plummeted 80%. Jake panicked and sold near the bottom, locking in massive losses that wiped out years of savings.

The painful lesson? Even promising companies can face catastrophic declines, and having too much of your money in one place is dangerous.

The Verdict: Is It Worth It?

So after all this, is it worth buying a single stock?

The answer depends on your personal situation, but here’s my take:

Yes, it can be worth it IF:

• You’re willing to do proper research
• You maintain adequate diversification elsewhere
• You understand and accept the risks
• You have the emotional discipline to avoid reactive trading
• You have enough capital to build a properly diversified portfolio

No, it’s probably not worth it IF:

• You’re just starting out with limited funds
• You don’t have time for research
• You’re easily swayed by market hype or fear
• You want a “set it and forget it” approach
• You prioritize maximum diversification with minimal effort

Final Thoughts

The decision to buy individual stocks isn’t black and white. Many successful investors include both funds and individual securities in their portfolios, adjusting the balance as their knowledge, capital, and goals evolve.

Whatever you decide, remember that investing is a marathon, not a sprint. The most important factors for long-term success are consistency, discipline, and a clear understanding of your own risk tolerance and investment goals.

Have you had success with individual stocks? Or do you prefer the simplicity of funds? I’d love to hear about your experiences in the comments!

Buying just one stock can be worth it as a way for beginners to learn about the market, provided the purchase aligns with their investment goals and they are aware of the risks.

The “7% rule” for stocks is a risk management strategy that dictates selling a stock when it drops 7% below the purchase price to limit losses and preserve capital. This rule, popularized by investors like William O’Neil, is based on the observation that even strong stocks typically don’t fall more than 7-8% below their ideal buy point. It can be implemented by setting a stop-loss order with your broker or through manual monitoring. Another related, but distinct, “7% rule” is a retirement planning concept where you assume a 7% annual withdrawal rate from your investments to determine how much you need to save for retirement, as explained in this YouTube video.