Sometimes a big bet can really pay off.
Take a look at some individual success stories from investing in the stock market in recent years:
- An investment in Apple Inc on 31 December 2009 would now be worth 10,000% of its original value.
- An investment in Tesla Inc at a similar time would be up by 2,500%
- An investment in Netflix in 2018 would have doubled by 2020.
When we digest these incredible growth stories, we cannot help but imagine what would have happened to our own wealth if we had chosen the right time to buy shares.
With all the intricacies of building an investment portfolio, it’s also sometimes a temptation to simplify the whole business by just staking your investment sum on a single company’s fortunes.
Who would invest in a single company?
There are many individuals who do actually invest like this – but not for the reasons you expect.
The largest holders of a single companies shares are:
Entrepreneurs. Their controlling stake in the business their engine for wealth, but also protects their control over the company.
Business executives. In the UK, board members of major listed companies are expected to spend a significant amount of their personal fortune to build up a stake in the business. The purpose of this is to align the interests of the director with the shareholder body that they represent.
Employees of start-ups. Young companies often like to supplement the wages of their company with stock option schemes. Stock option schemes are designed to incentivise loyalty and increase remuneration without resulting in a cash cost.
These provide the employee with shares in the business, for free, if they stay for a given period or meet other performance targets.
After a long career with a start-up, these employees can amass significant shareholdings.
What are the downsides of investing only in a single company?
The key issue is risk.
Shares are risky investments, generally speaking.
However, they are still recommended by advisers and pension providers as excellent places for some people to invest their money over the long term.
Why is this? Well, those advisors are not referring to an individual companies’ shares – they’re referring to a balanced investment portfolio. This would include investing in corporate bonds, investments in the property as well as spreading money across countless individual company stocks and shares.
The risk and reward profile of individual company stock, compared to a diversified investment portfolio is a world apart.
An individual stock could go to zero within a few months time. This occurs when a company enters bankruptcy, collapses due to fraud or otherwise shuts down.
Unless the global economy shuts down, this cannot occur to a well-diversified portfolio.
An individual stock is also very volatile on a week-to-week basis. However, a large portfolio will experience a much smoother ride as many of the individual ups and down will cancel out.
Therefore, the risk of placing all your money in a single company is to:
- Accept that your entire investment sum could be lost.
- Accept that the value of your investment will move in quite an extreme way and will probably be more volatile than the overall stock market indices.
In my opinion, it is completely unnecessary to accept this level of risk. The free investment courses on Financial Expert will teach you the tips and skills needed to build an effective portfolio which minimises those risks.
For other investing mistakes, check out the Investing Mistakes hub page.