Should you invest in shares or funds?
Find out how to get more bang for your buck and minimise the risks
You have been working hard and want to do something more interesting with your money than just leaving it to tick over in a savings account. You’re thinking about taking a leap into the world of investment. But, as a beginner in an area that’s notorious for seeing people lose as well as make small fortunes where should you start?
Should you buy shares in a company or put it in a fund instead? And does knowledge about a company’s products – maybe you use them – make their shares a suitable place to start? You’ve bought the T-shirt, but should you give them the shirt off your back in return?
If you’re feeling unsure, do not worry: we’ve weighed up the pros and cons of choosing your own shares versus investing in funds so you can make an informed decision on whether they’re right for you.
Buying individual shares
If you buy shares in a company you’re buying a slice of that company. It’s likely to be a very small slice, but it means that you may receive a regular share of its profits.
This profit share is called a dividend and in addition to the potential for regular income in the form of dividends, the value of the shares may rise if the company performs well. If you pick the right company (or if you’re lucky), you could do very well.
Not all companies perform so well, however, and even well-known household names can have a bumpy ride. The risk is that you invest in a company that doesn’t do well or whose shares fall in value when you need to cash your investment in. Which is bad news if you’ve invested a large chunk of your retirement savings, for example.
Investing in funds
Funds work in a similar way, but invest in shares in a collection of companies, they can also invest in other assets such as bonds and property. If you put your money into an investment fund you are spreading your money and reducing the risk of a single company performing badly.
There are hundreds of share-based funds to choose from with many having similar outlooks and near-identical names. Look closer, however, and you will notice they fall into one of two categories:
• Active or actively managed funds – here a fund manager or team of managers decide which companies to invest in, which shares to sell, when to trade and how many shares to buy and sell. It is a hands-on system where an expert makes decisions on what they think will earn the most money.
• Passive or tracker funds – here the aim is to closely replicate the performance of a stock market index, the FTSE All Share Index for example. A fund tracking this index would buy all the shares (over 600 of them) in the same proportion as the index and then buy and sell to maintain the correct allocation between them.
If you don’t have knowledge about or confidence in a particular company then certain funds focus on specific sectors such as technology or healthcare. Other funds look only at companies of a certain size while others only invest in companies that are based in the UK or, for example, Europe or Asia.
Stocks and shares combined
Whether you should invest in company shares directly or via an investment fund will depend on a number of factors, including:
1. How much risk you feel comfortable taking. Companies do go bust from time to time, even big ones. Share prices do go up and down and it is very difficult to know which ones will perform better than others. If you invest in share-based funds, especially if your money is spread across several different funds or your chosen fund is spread across lots of different companies or markets, you’ll take on less risk.
2. How involved in your investments you want to be. If you don’t want to keep a close eye on your investments, then buying shares in individual companies probably isn’t for you. Like following a particular sports team it can be enjoyable checking up on the performance of your shares in newspapers or online. A shift of just a few percentage points could earn or lose you thousands depending on the size of your investment and that can be accordingly gratifying or upsetting. Even if you invest in funds you should regularly review how your investments are doing, but you won’t need to take such an active interest.
3. How much you have to invest. You can get started investing in funds from around £50 a month, whereas you’d need more money to buy shares in individual companies. Only invest what you can afford to commit for longer periods as this is the best way of smoothing out the inevitable short term ups and downs in the stock market.
4. Costs and charges. You will have to pay stockbroking fees when you buy and sell individual shares. This can cost upwards of £7.50 each time you trade, but may be less if you hold the shares in an ISA. With funds, the charges are normally a percentage of the money you’ve invested and they’re taken out of the money you invest.
It is worth remembering whether you are investing in shares or funds, unless you are investing within an ISA, any gains you make on your investments will be subject to capital gains tax.
So that’s the lowdown: ask yourself some of the key questions about what you’re hoping for from your investment and how much time you’re prepared to spend and risk you’re prepared to take. Then it’s time to take a call on which sort of investment might work for you – or whether it’s best to stick to savings.
Before making financial decisions always do research, or talk to a financial adviser. Views are those of our mentors and customers and do not constitute financial advice.