I have neglected the topic of investing on this blog for far too long. Perhaps this is because I’ve been struggling with imposter syndrome and was concerned I didn’t know enough to write about it. However, I get quite a few investing questions particularly from beginner investors and want to be as helpful as possible to readers.
Today, we’ll tackle a common dilemma new investors often face. Should you buy individual stocks or funds? There is no definitive answer to this. Personal finance is personal! Instead, I will outline the pros and cons of both, which will hopefully help you make a more informed decision.
In this post I’ll cover:
- Why should I worry about stocks and funds?
- What is the difference between individual stocks and funds?
- What are the pros and cons of individual stocks?
- And the pros and cons of funds?
- Which is better?
Disclaimer: This post is not – and is not intended to be – financial advice. Always do your own research and seek professional advice if you are thinking of making a large financial decision.
Why should I worry about stocks and funds?
If you want to invest, you’ll need to decide if you want to buy individual stocks or funds. Understanding what they are and the differences between the two is important if you are to make an informed decision.
It is easier as it may seem, so don’t panic. The investment industry is full of jargon which makes it sound far more complicated than it really is. If you break down this jargon, you’ll realise the main components of investing are actually very simple.
What is the difference between individual stocks and funds?
There are some key differences between stocks and funds, which are important for beginner investors to understand.
Stocks are often referred to as shares. When someone talks about stocks, they are referring to the idea of owning part of a company, whereas shares represent the exact amount you own in a company. When you buy stock, you are buying part of one specific company.
As a definition, a stock is a security that represents the ownership of part of a company. This entitles the owner of the stock to a proportion of the company’s assets and profits equal to how much stock they own. Units of stock are called shares.
Funds comprise lots of different stocks. They are managed by a fund manager, who choses which companies to buy shares in.
Simply put, a fund is a pool of capital that a number of individual investors pay into, which is used to collectively invest in stocks.
What are the pros and cons of individual stocks?
The main pro of choosing individual stocks is that you are in complete control. You can decide which companies to buy shares in and which you want to ignore. If you enjoy researching and absorbing a lot of information, this could be the best option for you.
You can create a portfolio that suits all your preferences and ethical choices. You may also pay less fees. While trading platforms may charge a small fee to execute your trades, you won’t have to pay fund fees, which can mount up if you don’t shop around to find the best value.
The cons are that buying individual stocks requires a lot more effort on your part. You have to do a lot more research and are responsible for managing all individual investments.
This may well be too much to take in for beginner investors. There’s already a lot to learn!
There is also a risk that your portfolio may not be diversified and therefore you could be exposed to more risk. This means you could end up losing more money than necessary if one of the companies you invested in performs badly.
The risk is further increased if you can only invest a small amount. If you’re only investing £50 a month for example, you may only be able to buy a few individual stocks. This means you won’t have as wide a range of companies in your portfolio than if you bought into a fund and therefore you may be exposing yourself to greater risk than is necessary.
You are also more likely to buy stocks in companies you’ve heard about. This means your portfolio is likely to be weighted towards companies in your own country. If the markets in your country are hit by an adverse event – like Brexit for example – your investments could be harder hit than if your portfolio was more diversified.
And the pros and cons of funds?
Funds are generally seen as the simpler and safer option, particularly for beginner investors.
The fund manager does all the hard work and will make sure the fund is well diversified and suited to the risk preference you have specified. Like all investments, funds go up and down in value, but over time you can generate good returns from this form of investing.
There are many different types of funds. ETFs (exchange traded funds), index funds, fixed income funds, and equity funds are some of the most common. I’ll go into more detail on different types of funds in a later post.
You can also select a fund based on your moral or ethical views. Most providers now offer sustainable and ethical funds.
The main negative with funds is that you can’t control which companies comprise the fund you are buying. You are relying on the fund manager’s judgment. Obviously, fund managers are qualified professionals so they should know what they’re talking about. But, they are only human and may get it wrong from time to time.
Which is better for beginner investors?
There’s no clear answer to this. It will depend on your risk appetite, your experience and skillset and what your financial goals are.
For beginner investors, most people suggest funds are a better place to start, particularly if you only have a small amount to invest.
Personally, the vast majority of my investments are in various funds. This way I can forget about them and leave the hard decisions to people far more qualified than me!
I do hold a small number of individual stocks. This is more for personal interest than money I am really looking to grow. I enjoy tracking the movement of companies and seeing if I can begin to spot trends – I’m not there yet!
If you enjoyed this post, please like and share it across social media or with your friends! I’d also love to hear your thoughts and experiences. Do you prefer to invest in individual stocks or funds? Comment your thoughts below!
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