I recommend that the majority of your money go into a mutual fund, as it’s very likely you’ll consistently make money over time. But you may also want to invest some money into individual stocks. Many people choose to invest in companies they believe in. Or sometimes, you might choose stocks based on big company moves, like a merger, acquisition, or IPO (initial public offering). For example, in September 2014 Vail Mountain Resorts (MTN) purchased Park City Mountain Resort in Utah. (The “ticker” symbol — in this case “MTN” — is the nickname/abbreviation for the company that the stock market knows it by. Google “MTN” to see how the stock price has changed over time.) After this purchase, MTN’s stock price jumped 11.7%. ($1000 would have become $1117.)
For an IPO example, Alibaba (BABA), China’s largest e-commerce site, went public on September 19, 2014. Many jumped on the opportunity to buy shares once it went public. But before you jump on the IPO bandwagon, pay attention to the initial offering price (the share price early investors can pay before the stock debuts for the general public) versus the offering price to the general public.
“The vast majority of shares in a hot IPO such as Alibaba are sold to well-placed institutional investors prior to when the shares debut on a public stock exchange. … Investors who didn’t get in on the IPO ahead of the initial pricing — which is to say the vast majority of investors — will have to pay whatever the going price is generated by demand after the stock begins trading publicly.”
– Alibaba IPO Poses More Than the Usual Risks To Retail Investors, Fox Business
In the case of BABA, early investors were able to buy at about $68 a share, and the general public was able to buy on at around $93. So while investors bought at this higher price, early investors sold at a 37% gain, resulting in the stock price dropping for the next month.
If you’re lucky enough to place your bets with a company that does well, you can have huge returns. Just look at the life of major companies like Apple (AAPL), Facebook (FB), or Google (GOOG). (Wouldn’t it be nice to have invested $5000 in Apple in 2005, which would be worth over $150,000 today?!)
However, compared to mutual funds which have a diversified portfolio of stocks of different classifications (recall the Morningstar Style Box), stocks are not as reliable. Just look at Hewlett-Packard (HP) and Yahoo (YHOO). (As of June 2017, Yahoo ceased to exist and is now Altaba.)
Remember that when you invest in individual stocks, you’re taking a risk. In general, it’s wise to invest the majority of your money in mutual funds.
When you’re logged into your online brokerage account and ready to buy stocks, determine if you’ll need to pay a transaction fee for each trade. Sometimes the fee is around $7 or $10 per trade, but increasingly investment platforms are eliminating this fee to become more attractive to investors. If the investment platform of your choice doesn’t allow free trades, you may be given a certain number of free trades as a sign-up bonus.