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Investing Principal #10: Be aware of individual company risk and do your homework
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Investing in individual company stocks may provide an attractive potential return, but it comes with both company-specific and market risk combined. Most investors like to brag about the high-performing stock picks they made during cocktail parties; it is very exciting to pick the winner and tell stories. Nobody is excited to talk about investing in a well-diversified Exchange Traded Fund (ETF). An ETF is a basket of securities designed to follow the performance of its benchmark. Sometimes, boring investing is more prudent for beginner investors.
Investing in individual company stocks may provide an attractive return but it comes with a significant risk. The investor takes on both market and individual company risk. When the overall market is down, the individual company stock is likely to be down as well. Also, by purchasing the company stock, you assume its individual risk. Individual risk consists of a company’s business performance, financial results, competitive environment, and management changes. It is time-consuming and requires both knowledge of financial statements and practical experience to learn about company-specific risks. A beginner investor may find it easier to pick ETFs and create a diversified portfolio without exposing themselves to company-specific risk.
Disclosures:
The analysis is based on historical data and future expectations that may not be correct. This paper was written as an opinion only. The data is not guaranteed to be accurate or complete. Please consult with your financial advisor before making an investment decision. Neither ECNFIN.COM nor its author is responsible for any damages or losses arising from any use of this information. Past performance doesn’t guarantee future results.
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By Ivan Sichkar, CFA, FRM, CFP®
5
33 ratings
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Enter your email address to follow ECNFIN.com and receive notifications of new articles by email for free. Be the first to read and do not miss future timely research publications.
Investing in individual company stocks may provide an attractive potential return, but it comes with both company-specific and market risk combined. Most investors like to brag about the high-performing stock picks they made during cocktail parties; it is very exciting to pick the winner and tell stories. Nobody is excited to talk about investing in a well-diversified Exchange Traded Fund (ETF). An ETF is a basket of securities designed to follow the performance of its benchmark. Sometimes, boring investing is more prudent for beginner investors.
Investing in individual company stocks may provide an attractive return but it comes with a significant risk. The investor takes on both market and individual company risk. When the overall market is down, the individual company stock is likely to be down as well. Also, by purchasing the company stock, you assume its individual risk. Individual risk consists of a company’s business performance, financial results, competitive environment, and management changes. It is time-consuming and requires both knowledge of financial statements and practical experience to learn about company-specific risks. A beginner investor may find it easier to pick ETFs and create a diversified portfolio without exposing themselves to company-specific risk.
Disclosures:
The analysis is based on historical data and future expectations that may not be correct. This paper was written as an opinion only. The data is not guaranteed to be accurate or complete. Please consult with your financial advisor before making an investment decision. Neither ECNFIN.COM nor its author is responsible for any damages or losses arising from any use of this information. Past performance doesn’t guarantee future results.
Never miss an episode
Subscribe wherever you enjoy podcasts:
Apple
Spotify
Amazon
Our Mailing Address:
ECNFIN
1288 Kapiolani Blvd Apt 4003, Honolulu, HI 96814
Our Phone:
+1 720-593-1135
Our Fax:
+1 720-790-7606