Dollar Scholar Asks: Should I Buy Stock in Companies I Like?
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This is an excerpt from Dollar Scholar, the Money newsletter where news editor Julia Glum teaches you the modern money lessons you NEED to know. Don't miss the next issue! Sign up at money.com/subscribe and join our community of 160,000+ Scholars.
People take investing cues from all sorts of sources, from psychics to House Speaker Nancy Pelosi.
I'm not judging — I myself don’t really have a comprehensive investment strategy. Although I have a 401(k) through work, most of my interaction with big companies is through the products I use. I’m a Coke Zero fiend, so I guess that means I support Coca-Cola, and I am never more than two feet away from my iPhone, so I suppose that makes me an Apple fan.
But I’m not sure whether that means I should put my money behind KO or AAPL.
Is it a good idea to invest in companies that make products I like?
Kelly Lannan, senior vice president of emerging customers at Fidelity Investments, says that before I go wild picking stocks, I should ask myself a series of questions:
- How long do I plan to stay invested?
- What are my financial needs?
- What am I investing for, and how much risk can I potentially tolerate?
The answers will help me balance my overall portfolio.
From there, she says it makes sense to invest in what I know. Companies that I’m familiar with are a solid place to start because I understand what they have to offer.
“You’re investing in these companies by buying their products each and every day, or every year,” Lannan says. “If you’re confident enough to do that, that’s saying something.”
How much I like something can’t be the only factor I consider, though, says Jully-Alma Taveras, founder of the financial education platform Investing Latina. There has to be actual data that justifies my decision.
To find that data, I need to dig a little.
Taveras says that whenever I’m looking at a company, I should locate the investor relations page on its website to read up on how the company is operating and what its revenue numbers look like. I should Google to see whether there are any headlines that could affect its earnings, research who leads it and check out what its debts are.
Reading financial statements can be hard for new investors, but Taveras says I’ll get the hang of it quickly. If I devote a few hours to researching one company a month, by the end of the year I’ll be an expert — and know what’s happening behind the scenes at 12 companies.
“Any time that you're going to make an investment you want to do that sort of research,” she adds. “The more [you do], the stronger your portfolio is going to be because not only are you investing into companies that you like, but you're investing into them because they are going to be profitable and going in the upward direction.”
Lannan says I’ll also want to scrutinize a stock’s history. How has it performed in the past? Is it booming because of a short-lived trend — cough, GameStop, cough — or does it have long-term staying power?
“Let’s say you like a certain fast food company. If the five-year trend isn’t looking so hot, you might not want to go with them just because they make your stomach happy,” she adds.
Fidelity has a web tool where I can enter a ticker symbol and see the 52-week high, 52-week low, when those occurred, and more. I can also look up analysts’ estimates and such.
After I’ve finished my homework and feel confident in what I want to do, I’ll want to start small. This allows me to become more comfortable with the process and minimize my risk. Lannan suggests looking into fractional shares — and, once I purchase, holding onto them.
“Starting out, you don’t want to be buying on Monday morning and trading by end of day,” she adds. “It’s longer-term. It’s a means to achieve your goals.”
Taveras reminds me that if picking individual stocks still makes me nervous, I can invest in companies I like while still diversifying by choosing an index fund that simply includes my choice alongside others.
The bottom line
I can invest in companies with products I like, but I should only do so after I’ve come up with a portfolio strategy, identified my goals and educated myself about their operations.
Limiting myself to small-dollar investments to begin with is smart. Once I have a bit more experience, I can adjust my approach.
“Use the brands that you love as your way to get your research going,” Taveras adds.
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