You might have already heard that investing in stocks is one of the most dependable ways of creating wealth over the long term. But the stock market can be a relatively complicated arena with lots of different options. One of the decisions you will have to make as an investor is whether to invest in individual shares or in funds.
In this article, we’ll look at the pros and cons of funds vs. shares to help you make the best decision for your circumstances.
A share is a unit of ownership in a company. If you own a share, you essentially own a little bit of the company and therefore a portion of its overall value. If the company grows and becomes more valuable, your share increases in value too.
A fund, on the other hand, is a pooled investment that contains shares in a collection of companies. Some funds also invest in other assets, such as bonds and property. When you invest in a fund, you basically receive a slice of everything included in the fund.
A fund can be actively or passively managed.
Both shares and funds come with pros and cons to consider. Let’s break them down.
- You have complete control over the choice of companies to invest in.
- There are usually no annual or ongoing fees.
- They offer the potential for more gains depending on your choice of stock.
- They can be tax-efficient since you can control capital gains by timing when to buy and sell.
- Investing in shares carries more risk than investing in funds.
- They are time-intensive and potentially stressful as you have to individually research each company and choose the one that you feel works best for your portfolio.
- You have to hold a number of individual stocks if you want to adequately diversify.
- You will be charged a trading fee for buying or selling.
Pros of investing in funds
- They offer instant diversification. Since you are essentially investing in a basket of assets, your investment is instantly diversified, which minimises the effect of any unexpected losses from individual stocks or assets in your portfolio.
- Professional management is available through actively managed funds.
- Investors can typically avoid trading fees.
- They are convenient and less time-intensive as most of the work is done for you.
Cons of investing in funds
- Many have a minimum investment amount.
- They come with an annual expense ratio (a fee to cover the operating and administrative expenses of the fund).
- They can be less tax-efficient owing to the unpredictable distribution of income and capital gains.
RELATED: Index Trackers vs Managed Funds
There is no one-size-fits-all solution here. However, considering the following questions can help you make the best decision for your circumstances.
1. How much risk are you comfortable taking?
If you invest in funds, you will take on less risk as your money will be spread out over a range of different stocks or assets. The trade-off is potentially lower returns.
2. How involved in your investment do you want to be?
If you want to play an active role in choosing your investments, investing in individual shares might be a better option. You’ll get a chance to personally select the companies you invest in.
If you prefer a hands-off approach or don’t have the time, expertise or inclination to select and manage individual shares, then funds are probably a better option as you’ll get to buy many stocks in a single transaction.
3. How much money do you want to invest?
If you have a smaller amount of money to invest, funds might be the better option.
A £1,000 investment in a fund, for example, will buy you a fraction of a diversified portfolio of stock. With individual shares, this amount may only be enough to buy the shares of one company, exposing you to risk if the company underperforms.
When it comes to individual shares or funds, you don’t actually have to choose one or the other. If money isn’t an issue, both can be included in your portfolio to help you create wealth and meet your financial goals.
However, as always, do your homework first. Furthermore, only invest an amount that you can commit for the long term, as this is the best way to ride out the stock market’s inevitable short-term fluctuations.
Finally, whether you are investing in individual shares or in funds, consider investing within a stocks and shares ISA. This is a tax-free wrapper that shields your investment gains from tax, meaning that you get to keep more of your money.
Keep in mind that tax rules can change and that tax treatment depends on your individual circumstances.
When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.Tax treatment depends on your individual circumstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice.
Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.
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As an enthusiast with a deep understanding of the financial landscape and investment strategies, I'll delve into the concepts covered in the article titled "Funds vs. Shares: Which Should You Invest In?" by Sean LaPointe. I bring firsthand expertise to elucidate the nuances and provide valuable insights.
Overview: The article explores the decision-making process for investors, focusing on whether to invest in individual shares or funds. Sean LaPointe, the author, outlines the pros and cons of both options to guide readers in making informed investment decisions tailored to their circumstances.
Shares: A share is defined as a unit of ownership in a company, representing a fraction of its overall value. If the company grows, the value of the share also increases. Some key points related to investing in shares are:
- Investors have complete control over choosing individual companies for investment.
- No annual or ongoing fees are associated with shares.
- Potential for more gains depending on the choice of stock.
- Tax efficiency can be achieved by strategically timing buying and selling.
Funds: A fund is a pooled investment that includes shares in multiple companies, and sometimes other assets like bonds and property. The article distinguishes between actively and passively managed funds. Key points related to investing in funds include:
- Instant diversification is a significant advantage, minimizing the impact of unexpected losses.
- Professional management is available in actively managed funds.
- Investors can often avoid trading fees with funds.
- Funds are convenient and less time-intensive as most of the work is done by fund managers.
Pros and Cons: For investing in shares:
- Pros: Control over investment choices, potential for higher gains, and tax efficiency.
- Cons: Higher risk, time-intensive and potentially stressful due to individual research, and trading fees.
For investing in funds:
- Pros: Instant diversification, professional management, and convenience with less time involvement.
- Cons: Minimum investment amounts, annual expense ratios, and potential tax inefficiency.
Decision-Making Considerations: The article suggests considering several factors when deciding between shares and funds:
- Risk Tolerance: Shares involve higher risk, while funds offer lower risk due to diversification.
- Involvement Preference: Investors must decide how actively involved they want to be in choosing and managing investments.
- Investment Amount: Smaller investments may be better suited to funds due to instant diversification.
Final Thoughts: The article emphasizes that there is no one-size-fits-all solution and recommends considering personal circumstances when making investment decisions. It suggests a balanced approach, wherein both individual shares and funds can be included in a portfolio to achieve wealth creation and meet financial goals. Additionally, the importance of thorough research and commitment to long-term investment is highlighted.
In conclusion, whether investing in shares or funds, the article encourages readers to explore tax-efficient options like stocks and shares ISA, and emphasizes the need for careful consideration of individual circumstances and commitment to long-term financial goals.