Investors have been flocking to the Stock market in the form of investing in individual stocks and in mutual funds, and have experienced success over the past decade of market gains. For those new to investing, it can be scary when picking what to invest in. Let’s review some common forms of investing and the different styles they offer along with risk objectives to help you pick your first investment. Here are the three factors to consider which type of investment is best for you:
- Risk return trade-off; determine your risk tolerance; this will affect your potential returns, the higher the risk, the higher the possible returns and losses. The lower the risk, the lower potential returns and lower potential losses
- Time available; how much time do you have for researching investments in stocks? This can require extensive research to ensure you are picking a quality stock for your risk profile; if you wish to have a diversified portfolio, you will need to purchase multiple stocks. Investing in mutual funds archives diversification simply because the fund invests in hundreds of stocks based on the fund’s objectives.
- Costs and fees; Investing is not free; each investment type comes with a fee structure. Planning on holding shares for the long term, then you don’t want a broker who charges a management fee. If you want to put your faith in the professionals and have them invest for you via mutual funds, then there will be a management fee. Not all funds or brokers charge the same fees, so do your research to ensure you keep most of your profits.
The Difference between Stocks and Mutual Funds
Stocks
If you’re knowledgeable of the market and are comfortable doing your own research, then picking individual stocks may be right for you. If you’re a novice or don’t have the time to research each stock pick than Mutual Funds may be the best strategy for you. Buying stocks makes you a part-owner of that corporation. The reason we want to own shares in a company is to make money; this is accomplished in two ways with stocks. Some companies want to pay out their profits to their shareholders and will issue a dividend. This can be a nice stream of income if that is your objective, but remember this is considered taxable income. The other way you make money owning stock is by selling for a higher price than you paid for the stock. Remember, the profit is considered income and is taxable. Stocks trade all day, and the second you put a sell order which matches a buyer, you will have your money instantly.
Mutual Funds
Mutual funds buy various investment instruments based on the fund’s investment objectives. They pool funds from hundreds of investors. When you purchase shares in a mutual funds, you own a share of that fund. The price of each share is based on the value of the underlying investments. Take the total value of the underlying investments and divide that number by the number of the mutual fund’s shares outstanding to get the fair value of each share. You can buy shares in Mutual funds throughout the day, but their price adjusts at the end of each business day based on the value of its investment. If the market is crashing and you sell at 9:00 am, the price you get will be based on the closing price at the end of the day, not when you sold at 9:00 am. During a down market, this can limit your ability to limit your loses in a timely fashion.
There many different types of stocks and mutual funds. The various types allow you to focus on areas that might interest you or that match your investment objectives. You can focus on small or large-cap stocks, or you can focus on industry or geographic location-specific companies.
Outside of stocks, bonds and bond funds are popular for risk-averse investors as they offer returns for those that need a fixed income. These investments are generally safe yet provide low returns. Not all bonds are a low risk, so do your research, the higher the return, the higher the risk.
Risk-Return Tradeoff
The general, though, is that Stocks come with a greater risk than mutual funds. Mutual funds have the benefit of pooling funds from hundreds of investors to diversify the funds amongst multiple stocks or bonds depending on the fund’s objectives. This helps spread the risk among many different companies, a loss in one company can be offset by the other companies in the fund. To achieve this by investing in individual stocks will require more resources (money). Based on this, many believe that mutual funds are is the best option as opposed to individual stocks. You can have a greater return on stocks you believe will outperform the market, thus beating a mutual fund returns. Just look at how Amazon stock has performed this past year, what mutual fund could you have bought that would match that return. It’s all about your risk tolerance. Deciding what is right for you is important to know whether to choose the stock market or mutual funds for your investments. One of the most viewed and most popular queries is Tata Motors share price nowadays, if that company interest you can either buy the stock directly or find a fund that has a large investment in the company.
Time Available
Do you have the time to research various stocks you’re interested in and then to keep up with what is happening with the company and overall market. You will want to understand how to read financial reports and how the economy will impact the business. This can be a full-time job if you do it right and not just listen to the pundits. You’ll need to find companies, both small and large-cap, and different industries. This will help you diversify your portfolio. Investing in a dozen or more companies can be time-consuming to keep up with on your
Mutual funds, on the other hand, take care of these tasks for you; all you have to do is research which fund matches your objectives and risk profile. Make sure to evaluate their past performance and any major management changes. You will also want to pick sectors that seem promising like technology. Of course, you still need to know how the economy is doing.
Costs and Fees
There are so many options when it comes to buying stocks; we will highlight the most common here. Full-service brokers charge higher transaction fees and often charge monthly or yearly management fees. But they provide advice and other services that may be of interest to you. If you are comfortable doing everything yourself you can use a discount brokerage,
they offer no-frill services and low cost to buy and sell, in most cases $10 per transaction.
The options for purchasing Mutual funds are similar but typically come with an annual management fee, in some cases, these can be significant. It is important to understand the management fee before purchasing a mutual fund.
The more actively-managed the fund is, the more the fee will be. There has been a trend of late to offer index-based funds, which require very little management; thus, they offer lower fees.
We hope we have some clarity on your options to invest for your future. If your a first time investor don’t be afraid to jump in, just make sure to educate your self first, good luck!
