Buy Stocks of Individual Companies or Buy Stocks via Mutual Funds
Answering the question of whether to buy stocks of individual companies or buy stocks via mutual funds takes an exploration of your objectives and your willingness to take risk. If you understand the risks and rewards of investing in stocks, and you have the ability and willingness to take risk, then the next step is to decide if you would like to buy stocks of individual companies or buy stocks via mutual funds.
Buy Stocks of Individual Companies: Pros and Cons
If you are considering buying stocks of individual companies consider both the pros and cons versus the pros and cons of mutual funds.
Buy Stocks of Individual Companies: Pros
- Control: You decide which stocks you buy, sell and hold in your stock portfolio.
- Ownership: When you buy stocks in individual companies you have an ownership stake in the company.
- Ease of Execution: With the advent of the internet, there are dozens of discount and full service brokers where you can buy stocks online and/or with the assistance of a financial advisor.
Cost: The competition amongst brokers (discount and full service) has driven the price to tens of dollars per trade. The cost generally depends upon the size of your portfolio with the broker, number of trades per month/year, number of shares you buy/sell, and whether you trade online or with an advisor.
Buy Stocks of Individual Companies: Cons
- Lack of Diversification: If you decide to buy stock of individual companies, it is generally difficult to diversify your account to the same degree as if you buy stock via mutual funds. If you buy stock in individual companies you should be prepared for more volatility than if you buy stocks via mutual funds.
Resources: If you decide to buy stocks of individual companies on your own, then it will take time, energy and dedication. It will also take research, patience and, sometimes, trial and error.
Buy Stocks via a Mutual Fund: Pros and Cons
Mutual funds are an investment that allows investors to pool their money and hire a portfolio manager. The manager invests this money (the fund's assets) in stocks, bonds or other investment securities (or a combination of stocks, bonds and securities). The fund manager then continues to buy stocks and sell stocks and securities according to the style dictated by the fund's prospectus.
Buy Stocks via a Mutual Fund: Pros
- Diversification: The beauty of a mutual fund is that you can invest in a single mutual fund and obtain instant access to a hundreds of individual stocks or bonds.
- Professional Money Management: Many investors don't have the resources or the time to buy stock of individual companies. Investing in individual securities, such as stocks, not only takes resources, but a considerable amount of time. By contrast, mutual fund managers and analysts wake up each morning dedicating their professional lives to researching and analyzing current and potential holdings for their mutual fund.
- Systematic Investing and Withdrawals: It is simple to invest regularly in a mutual fund. Many mutual fund companies allow investors to invest as little as $50 per month directly into a mutual fund. Money can be pulled directly from a bank account and invested directly in the mutual fund. On the other hand, money can be regularly withdrawn from a mutual fund and be deposited into a bank account. There are generally no fees for this service.
Low Minimums: Many mutual fund companies allow investors to get started in a mutual fund with as little as $1,000. Schwab's mutual fund family has a minimum of $100 for many of their mutual funds.
Buy Stocks via a Mutual Fund: Cons
- Management Fees: You get what you pay for. If you want to take advantage of the pros of mutual funds, you must pay for it.
Variety: If you decide to buy stock via mutual funds you will find, odd as it may sound, more mutual funds to choose from than individual stocks trading on the New York Stock Exchange. Be prepared to spend time and resources in order to buy mutual funds and manage your portfolio.
Buy Stocks or Not to Buy Stocks
If you are investing for growth, whether or not you buy stocks of individual companies or you buy stocks via mutual funds, there will be patches of volatility. Prior to making the decision of which route, be sure to understand the pumps in the road, and whether or not you are willing to stay on the path.