Stock picking is not difficult, but often requires a little more familiarity than a popular fund investing. If you are interested in stock picking, you can get started by reading this post.
I often hear it said that stock picking is not worthwhile because it is dangerous and difficult. Companies and the stock market should be constantly monitored, and it is difficult to get a better return than the index.
I want to challenge and dispel the absoluteness of these claims and counterbalance the potential benefits of investing in stocks.
Too many are reluctant to start investing in stocks – but to no avail. At its best, stock picking makes investing interesting, educational, and exciting, without forgetting your returns.
My own investment story started a couple of spring ago, in 2019. I started with monthly savings in a few passive index and ETF funds that invest around the world.
My interest in stock picking stemmed from a growing desire to better understand what kind of companies the index and ETF funds of my choice contain, and what other companies can be found on the world’s stock exchanges. Also, I was tempted by the desire for possible additional returns, after all, the return potential of direct stocks is greater than that of funds.
So it’s no wonder I couldn’t resist trying stock picking. And after buying the first shares, I was already quite hooked!
The benefits of stock picking
Stock Pickers have some experience I have found that it has a lot more to offer than just a potentially high return on investment and wealth accrual.
I am fascinated by the idea that, as a shareholder in Marimekko, I own a small stake in Marimekko and can participate in the annual general meeting if I wish. In this way, I get closer to the companies I own and learn to understand their operations more concretely.
Also, being able to choose which companies to invest in is inspiring. I can choose not to invest in companies that fight against my values and, on the other hand, invest in players whose values are in line with mine. Equity investing is one form of influence.
Stock picking is also general education. Today, I follow world events extensively and reflect on their impact on the business of the companies I own, but also on the market in general.
To support stock picking, I read, for example, the Financial Times, the Seeking Alpha website, and market reviews produced by investor services.
It is recommended to monitor and, if necessary, update the investment targets, but less time and effort will suffice.
By diversifying the risks into small ones
A stock investor needs to keep in mind that there is no high return potential without risk. In practice, risk means the probability of losing the money invested. Therefore, whenever I place a sum that I am willing to lose, so scary as it sounds.
Diversification is the best medicine for equity investment risks. It is recommended that you own at least 7-10 shares of a different company. It would also be important to select companies in different industries in the portfolio that are as interdependent as possible.
It is therefore not necessarily advisable to select two or more companies in the same industry in the portfolio.
For many novice equity investors, adequate diversification of the portfolio into shares of different companies may seem costly at first. Indeed, some intermediaries charge high trading costs for small investment amounts, making it most efficient to invest a larger amount in a single company at a time, for example between EUR 500 and EUR 1000.
According to the stock exchange foundation, it would be a good idea to keep stock trading costs below one percent so that it does not eat too much return.
Some intermediaries charge, for example, a fee of up to one percent per share transaction. In this case, even a small amount can be invested without major cost worries, and it is easy to increase and diversify one’s shareholdings step by step.
But no worries, I was in pain at the beginning with the high costs of brokers. However, with my previous index and ETF fund investments, I had already created a comprehensive multi-sectoral and geographical diversification of my portfolio, which served as a good safety net for an equity investment experiment with shares of one company. I was the first to buy Neste shares.
P.S. In my next post, I’ll explain how I pick up stocks myself and outline a few of the selection criteria I use to choose the companies I invest in. Stay tuned!