Getting started with individual stock investing can feel overwhelming. The good news is that with the right foundation, you can build a portfolio that fits your goals while avoiding common pitfalls. The first step is understanding the types of accounts available and how they impact your long-term plan.
Brokerage Accounts vs. IRAs
When you open your first investment account, you’ll often choose between a traditional brokerage account and a retirement account such as an IRA. A brokerage account gives you flexibility. You can add funds, buy and sell stocks, and even withdraw money for a big purchase without penalty. This makes it a useful tool for building wealth that you may want access to at any point, especially if your goal is to begin trading individual stocks right away.
An IRA, on the other hand, is designed for retirement savings. The IRS allows tax-advantaged growth, but you typically cannot withdraw funds until age 59 without penalties. For beginners, a brokerage account is often the easiest way to get started in the market and begin stock picking. At the same time, experienced investors know the importance of maxing out retirement contributions—currently $7,000 a year—because of the long-term tax benefits.
Many investors ultimately use both, contributing regularly to an IRA for retirement while keeping a brokerage account for individual stock investing. That balance allows you to participate in short-term opportunities while still building a strong foundation for the future.
Building Your Portfolio Allocation
After choosing your account, the next step is deciding how to structure your portfolio. Allocation means dividing your investments between different asset classes such as stocks, bonds, and real estate. Your mix will depend on factors like age, risk tolerance, and financial goals. For example, an investor planning to retire in 30 years might hold an 80 percent allocation in stocks and 20 percent in bonds, while someone closer to retirement might prefer more stability through higher bond exposure.
Once you’ve decided on your stock allocation, you’ll need to decide how much of it will go toward individual stocks versus diversified stock ETFs. For investors who want to pick stocks themselves, setting aside 10 to 50 percent of your stock portion for individual names is common. This allows you to benefit from potential upside without taking on unnecessary risk.
Decide on Portfolio Allocation
After your accounts are in place, the next decision is allocation. A common approach is to split your portfolio between stocks and bonds, adjusting the balance depending on your age and retirement timeline. Younger investors often lean heavily toward stocks, while those closer to retirement include more bonds to reduce volatility.
From there, you can decide how much of your stock allocation should go to ETFs and how much should go to individual companies. Since this article is focused on stock picking, let’s assume you are carving out a portion of your stock exposure for individual names.
Choosing the Right Number of Stocks
When it comes to selecting individual stocks, balance is key. Owning too few exposes you to excessive risk, while owning too many makes your portfolio behave more like an ETF. A good rule of thumb is to hold between 10 and 20 individual stocks. This number provides diversification while still allowing you to benefit from strong performance in companies you believe in.
You’ll also want to monitor your position sizes. One stock should not make up more than 50 percent of your individual stock allocation. Keeping a balanced mix helps you avoid being overly dependent on one company’s success or failure.
Developing Your Stock-Picking Strategy
How do you decide which stocks to buy? There are many strategies. Some investors focus on technology or growth companies. Others follow professional analysts or use fundamental metrics like price-to-earnings ratios and revenue growth. Still others pay close attention to market trends.
The truth is that there is no single “correct” method. The best approach is the one you are comfortable with and willing to refine over time. Beginners rarely get everything right, but investing is a learning process. By tracking your portfolio, studying the market, and adjusting as you go, you’ll develop your own set of tools and instincts.
The Benefits of Individual Stock Investing
Why put in the effort to invest in individual stocks when ETFs and mutual funds exist? The answer is simple: potential returns and control. While a diversified ETF may keep pace with the market, building your own portfolio gives you a chance to outperform. If you can achieve annual returns of 15 to 25 percent by carefully selecting stocks, your wealth will grow much faster than if you only invest in broad market funds.
In addition, managing your own portfolio saves money. Many mutual funds carry hidden fees, and financial advisors often charge significant percentages of assets under management. By taking ownership of your strategy, you avoid these costs and retain more of your returns.
Bottom Line
When you start out investing in individual stocks, it’s all about building knowledge and confidence. Open the right type of account, design a balanced allocation, choose a manageable number of stocks, and develop a strategy you can improve over time. With patience and discipline, individual stock investing can be one of the most powerful ways to grow wealth and take control of your financial future.
Ready to Build Your Portfolio?
Investing on your own can be rewarding, but having expert guidance helps you avoid costly mistakes and move faster toward your goals. Contact Michael Leslie Investments today, we provide tailored strategies to help you make smarter decisions and stay on track.
