STOCKS OR FUNDS: WHICH IS BETTER?

Posted by stocker on June 1, 2010 in Stock market basics | Short Link

Stocks are risky and you can lose all or part of your money. Everyone needs to know that as they rifle through their new Stock Market For Dummies book getting all excited reading about investing and making money. There are no guarantees and the smart investors diversify their stocks so that they don’t have too much in any one stock or industry.

As to the question of whether it is better to buy funds or stocks though, there is no right or wrong answer. Some of it will depend on how much you have to invest. If you only have a couple thousand dollars, it will be difficult for you to buy 5 or 6 stocks and properly diversify your holdings. In that case, it might be better to to buy a mutual fund that invests in a basket of stocks.

There are stock funds (or equity funds) and mutual funds that are now available for seemingly every investment strategy you might have. Stock funds invest just in stocks and mutual funds can invest in stocks, bond, money markets, and other investment vehicles.

If you want big short terms gains, you will be able to find a fund with that goal. If you are more conservative and want long terms growth with stocks that pay dividends, you should be able to find something for that. If you want to only invest in stocks that comprise a certain industry, that is available as well.

An advantage of stock funds, some people believe, is that your money is being managed by a “professional”. Of course some professionals are better than others and there are never any guarantees. When you put your money in a mutual fund, you have to keep your fingers crossed that the fund manager knows what he is doing and is a good stock picker.

The cost for having the “professional” manage the fund and your money is not free. There will be a fee which is part of the price you pay to get into the fund. The amount of the fee is different for every fund and the way you are charged can be different as well. Before you invest in funds you should do some research and understand the real costs you are going to be paying for the privilege of having your money managed by someone else.

Some people hate putting their money/investment decisions in the hands of another person. They would rather buy their own stocks and make their own decisions. If they do well, they can take all the credit. If they fail, they at least know that they can’t blame it on someone else. Whether you decide to invest in mutual funds or individual stocks that you buy yourself depends a lot on the person. 

If you are one of those people who are interested in keeping up with individual stocks and constantly looking for the best stocks to buy right now at any point in time, you will not be able to do that through stock or mutual funds. Buying and selling stocks yourself will be the route you have to take so you should keep that in mind.  

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