How To Pick a New Stock When You Already Have a Few or More
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Nicole Spector
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Jenna Klaverweiden
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Just about every financial expert out there champions investing in order to grow and protect your wealth, and that includes investing in the stock market. With stocks, diversification is key to success. That means you need to have more than one stock in your portfolio, with the stocks spread across different companies and sectors.
Since owning multiple stocks is so important (some experts recommend owning at least 15 stocks), it’s necessary to know how to pick a new stock when you already have a few or more in your portfolio. GOBankingRates spoke with financial experts to learn about the five things you need to do when thinking about adding a new stock to your collection.
Know Your Financial Goals and Risk Tolerance
Whether you’re a seasoned investor or a newbie, you need to have your financial goals well realized and ensure you’re on the best path to meet them. If you’re looking into buying any stock, no matter how much you already own, you need to know where this stock will fit in your overall game plan.
“You should always have a plan before buying any stock,” said Michael Martin, vice president of market strategy at TradingBlock. “If you’re young and can handle more risk, a growth stock may fit your portfolio. If you’re older and need income, dividend stocks might be a better choice.”
Here’s a fleshed-out example.
“Amazon does not pay a dividend, while Johnson & Johnson currently offers a dividend yield of about 3%,” Martin said. “Make sure your stock choices align with your financial goals. Also, know that high-dividend-paying stocks may not appreciate as much as growth stocks.”
Invest In Companies You Understand and Appreciate — With Caution
In some ways, the process of investing in a new stock when you already hold stocks is the same as investing when you have nothing. You need to be just as rigorously inquisitive and informed about the company you’re thinking about investing in.
It can be savvy to invest in companies whose products or services you already use, understand and appreciate to minimize high-level research, but don’t get carried away and buy a stock just because you love the company behind it. Not only could you be too biased, but you also could overspend.
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“Make sure you’re not overpaying,” said Alejandro Zambrano, chief market analyst at ThinkMarkets.
“A media buyer I know once recommended Meta stock because he knew firsthand how valuable their ad platform was. He bought the stock when it was cheap. Another friend in gaming knew exactly which gaming stocks were hot but didn’t factor in how much good news was already priced into the stock and lost money on the investment,” he said.
Therefore, it’s crucial to do research even if you’re familiar with the company.
“So, the lesson? Invest in great companies that you know, but always check basic metrics like P/E ratios and compare them to the sector and the general market to ensure you’re not paying too much,” Zambrano said.
Determine Any Reasons To Not Buy a Particular Stock
Before Martin buys anything, he asks himself not only why he should buy it but also why he should not buy it. It’s a matter of being your own devil’s advocate.
“The stock market is no exception,” Martin said. “Start by writing out all the reasons that buying a particular stock may be a bad idea. When it comes to money, it’s always good to have a degree of pessimism.”
Ensure the Stock Will Add Diversification
Having a well-diversified portfolio is key to growing wealth and creating financial security for your future, including your retirement. When branching out to buy a new stock, look for a type that you don’t already have much of in your portfolio, with the aim of diversification.
“For example, if you already own a tech stock like Apple and want to add Amazon, ask yourself if you’re comfortable with having that much exposure to one sector,” Martin said. “If you believe in tech, that’s fine, but portfolio diversification is a proven method to reduce risk.”
Consider Whether an ETF Would Be a Better Choice
When thinking about buying an additional stock, it’s worth considering whether an exchange-traded fund (ETF) is a better choice.
“In the U.S., there are thousands of ETFs available,” Martin said. “Last month, my father was debating which volatile chipmaker stock to buy. I suggested he buy them all — through an ETF. ETFs offer broad exposure to industries and are particularly useful when the sector is volatile, such as tech or chip stocks.”
Note that there is a financial caveat with ETFs. But it could be worth it.
“On the downside, ETFs have fees (unlike individual stocks),” Martin said. “Vanguard, known for its low fees, is a great option. For example, the Vanguard S&P 500 ETF (VOO) has an expense ratio of just 0.03%. Over time, portfolios often benefit from sector or index ETFs, assuming the fees are nominal.”
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