Whether you’re saving for a big investment or hoping to retire soon, the stock market is a good place to make your money work for you. Two of the most common forms of investment are mutual funds and individual stocks. Both of them can provide big returns, but you need to understand each option before you sink money into them.
You might feel like a stock market expert after watching expert and pundit reports on T.V., but sit down and do your homework before you buy individual stocks for your personal portfolio. When financial experts say that managing your portfolio full of individual stocks takes time, they aren’t exaggerating. Every stock you buy requires extensive research before a purchase into things like management style, quarterly reports and earnings forecasts.
Another factor in investing with individual stocks is how quick prices – and fortunes – change. Information is everything to stocks, and it can send prices tumbling in the blink of an eye. If you aren’t watching updates closely, negative news can hit your money hard before you have a chance to sell bad investments. Gene Marks of business consultant firm The Marks Group writes in Entrepreneur that he equates investing in individual stocks as the equivalent of playing roulette after his experience. While investing with a professional can cost you more money, it’s their job to monitor the markets all day and move your money before a catastrophe.
Building your own portfolio takes time and research, but Arielle O'Shea of NerdWallet points out that managing stocks yourself means you don’t have to pay annual fees to a fund manager, and you have total control of what stocks they buy. If you’re in a high enough tax bracket that capital gains taxes are a major concern, investing with individual stocks can help you control your income based on when you time trades. O’Shea also says that investing in individual stocks could be a good option if you love the thrill of the chase.
If you’re new to investing, or you don’t have the time to pour over the news from Wall Street every day, a mutual fund might be a great place for your money. According to Investopedia, a mutual fund is a pool of cash controlled by money managers who invest it in the markets and other assets. You only have to research which type of mutual fund is right for you, and from there a professional makes sure that the group’s portfolio is diverse and balanced for maximized profit. When you’re part of a mutual fund, Arielle O’Shea explains that you pay a nominal ongoing fee to be a member, and you usually avoid trade costs. It might be less exciting than individual stocks, but you save time in research and portfolio maintenance.
Like all investment options, mutual funds aren’t perfect. Since you’re not making the big decisions, you have no way to manage your capital gains taxes from your possible fund income. You don’t know the small details of what businesses your money is invested in, so even if you saw breaking news about a company you own stocks in, there is nothing you can do but trust in your money manager.
Individual stocks and mutual funds are just two investing options, and there might be others that are better-suited for you. Before you make a big commitment, make sure you talk to your financial advisor.