3 Good Reasons to Buy a Stock — and 1 Very Bad Reason

You may, from time to time, buy apparel or home decor on a whim. And as long as you’re not racking up debt to do so, there’s really nothing wrong with the occasional impulse purchase.

Stocks, on the other hand, aren’t the sort of thing you should buy without doing your research first. Here are three good reasons to add a stock to your investment mix.

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1. It lends to diversity in your portfolio

A diverse stock portfolio can not only help you grow wealth, but also protect you during periods of market volatility. If you diversity your portfolio, when a single industry takes a beating, you’re not necessarily out of luck.

During the pandemic, for example, the hospitality industry got battered, so if you happened to own a lot of hotel and restaurant stocks, you may have seen your portfolio value decline substantially. But if hotel and restaurant stocks only comprised about 20% of your investment mix, that decline may have been more subtle.

Stocks that offer more diversity are generally a good addition to your portfolio, provided you’ve vetted the companies behind them.

2. It has solid growth potential

Not every stock is a winner off the bat. Sometimes, it takes time for a company to find its footing. But if you do your research and come to the conclusion that a given stock has a lot of growth potential, it’s probably a good one to buy.

3. It pays dividends

The great thing about dividend stocks is that they not only pay you money, but can also serve as a backup income source during periods of market volatility.

Say the stock market crashes, you need money, and your emergency fund has run dry. The dividend payments you collect could put cash in your pocket. And if you don’t need those dividends, you can always reinvest them.

Here’s one bad reason to buy a stock

Some stocks get a lot more press than others. Those stocks are known as meme stocks, and while they can, in some cases, be a solid investment, you shouldn’t buy a stock simply because it’s in the news a lot.

Take AMC Entertainment (NYSE: AMC), for example.

AMC shares have soared this year, but that’s coming off a period where the theater chain was on the verge of filing for bankruptcy multiple times during the pandemic. And while things may be looking up for AMC now that coronavirus-related restrictions are being lifted and theaters can more easily welcome back guests, the chain still faces its share of competition from streaming services.

This isn’t to say that AMC specifically is a bad buy. In fact, it and other meme stocks may be right for you. But do your research and add those stocks to your mix because you feel they’re a good bet — not because you keep hearing about them.

Make the right call

Adding stocks to your portfolio isn’t something to do lightly. The next time you’re inspired to buy a stock, ask yourself if it makes sense for your portfolio and aligns with your general strategy. And if you’re going to take a chance on a hyped-up stock, make sure you know what you’re getting into before taking that plunge.

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Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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