We know that index funds and individual stocks have advantages and disadvantages. It’s why people spend so long looking for better methods to monitor the worth of their assets, whether that be through Masterworks or any other platform. So, how do we know which one is right for our investment portfolio? Here is an in-depth guide on the two types of investments.
An individual stock is a stake that we invest in a public company. Research from Goldman Sachs revealed that in the past 140 years, stocks in the United States have averaged a return of 9.2% in 10 years. Even with the increase in prices of goods and services, the return of stock markets remains high. Individual stocks are an ideal way of building long-term wealth.
There are two types of stocks that we can choose from:
- Preferred Stock- this type of stock entitles us to a fixed dividend. The payment is made first before that of ordinary or common share dividends.
- Common Stock-stocks that have voting rights. Most of the time, payment is made depending on how the company has performed.
In general, prices of stocks are mainly influenced by the performance of a company, its industry, and the economy of a country.
Benefits of Individual Stocks
Control- we have the ability to make the decisions that we want for our investment portfolio.
Lower Starting Fees- investments with individual stocks have lower fees; we can start with the few amounts that we have.
Chances for high returns-individual stocks have a chance of earning higher returns, especially if the selected company starts growing.
Higher Risk Involved
Buying stocks has a more significant risk compared to index funds. Most of the time, companies fail, and if they don’t recover, we lose our money.
Investing in individual stocks means that we have to study many different companies and select the ones that look favorable. This takes time because we also have to look at their various financial year reports.
Hard and Expensive to Diversify
It’s also expensive to diversify our portfolio by choosing different companies. Buying 15 to 30 stocks can be costly compared to index funds because we can diversify by buying one stock of index investments.
When we buy an index fund, we are purchasing a number of stocks that are meant to track a particular index, for example, the Dow Jones Industrial Average. In short, when we buy shares in an index fund, that means that we own a variety of stocks in multiple different companies.
Benefits of Index Funds
Easy to Begin Investing
Index funds are a great way to begin the investment journey, especially for beginners. Less research is needed, unlike for individual stocks. Unlike with the single stocks’ investments, the collapse of one company doesn’t worry us because we have invested in many.
Easy to Diversify
It’s easy to diversify because the investment is in different companies. It’s expensive to diversify in individual stocks because buying one stock is expensive. The diversification aspect also makes index funds less risky than individual stocks.
Less Time Consumption
There is less time consumption in index funds because we are investing our money in multiple companies. So, there is no need to keep on researching one company at a time.
Disadvantages of Index Funds
No Personal Control
When we buy index funds, we have no control over the type of company we invest in. This might make us invest in the wrong companies.
Index funds have annual fees that are called expense ratios. They can sometimes be expensive according to the index fund type that we chose.
We don’t have to be confused while deciding whether to invest in index funds or individual stocks. This article has great information that can help us while starting out.