Stock Funds vs. Individual Stocks: Which is Right for You?

Investing in traditional stocks and stock funds can provide you with benefits as an investor. While these types of investment are similar, there are a few key differences that you should understand as an investor. Here are a few things to consider about investing in stocks and investing in stock funds.

Potential

When you are thinking about the potential of the two investments, direct stock ownership is going to have more potential for gains. When you invest in a stock fund, you are a partial owner of thousands of different shares of stock. This means that the performance of all of the different companies is going to work together in order to give you a cumulative return on your investment. If a few companies in the portfolio perform poorly, it can bring down the value of the entire portfolio.

When you invest in stocks, you are going to be able to realize all of the gains from the performance of a company. If a company stock increases in value by 50 percent, you are going to get a 50 percent gain in your portfolio. If that same stock increased in value as part of the portfolio of stocks in a stock fund, you would not be able to realize the entire 50 percent gain.

Risk

Even though the potential for reward is greater with individual stocks, the risk is a lot higher also. One of the big benefits of investing in a stock fund is that you get a diversified portfolio. This way, if you happen to choose the wrong company, you are not going to lose your entire investment. Instead, you will have all of the other stocks in the portfolio to make up for the poor performance of the one company.

Professional Management

Another big difference between these two types of investments is the level of professional management. When you are investing directly in stock, you will have to make all of the individual investment decisions by yourself. This means that you have to do all of the research yourself and then make the decision as to which stocks to purchase. This can be very difficult for investors that are not experienced in this area.

A stock fund, on the other hand, chooses them for you so you do not have to worry about which stocks to choose. Instead, the fund manager is going to take care of the entire process for you. They will do all the research and choose the individual stocks to invest in. They will then decide how long to hold the stocks and when to sell them.

Cost

You should also consider the cost of investing in these two types of investments. With both investments, there is a good chance that you are going to have to pay a commission to purchase them. A stock fund, however, will also have ongoing costs in order to pay for the professional management.