Published: 16 August 2019
While advances in technology mean many stock exchanges no longer have trading floors, investing in companies by buying shares in them remains popular. It’s not the only way to participate in the ups and downs of the stock market though. Another popular way is through collective investments, otherwise known as funds.
So what’s the difference between the two approaches?
Buying shares in individual companies with the aim of profiting from an increase in their price is perhaps the most traditional form of investing.
For some investors who are willing and able to accept the risk that investments can go down as well as up and they may get back less than they put in, that’s where the thrill lies – it can become a hobby to try and identify potential winners, researching companies and markets and aiming to make well-timed trades.
It’s become more accessible too, with the rise of online investment platforms and the sheer volume of information available on individual markets and companies making it easier to invest directly in stocks and shares. But with high potential reward comes high potential risk. Taking a bet on one or even a handful of companies can leave an investor distinctly vulnerable to events out of their control.
That’s why buying shares in individual companies tends to be the preserve of more experienced or expert investors and/or those who like to dabble in direct investing alongside other types of investment. It can be less suitable for those who are risk averse and might lie awake at the prospect of sharp investment losses.
Another way to benefit from stock market growth is to invest through collective funds such as unit trusts, ‘open-ended’ investment companies and investment trusts. These funds pool the money paid in by large numbers of people and invest it on their behalf through a professional fund manager (or team of managers).
The potential advantages of this approach are numerous - being able to benefit from the experience and expertise of the managers; the vast choice of funds available; reduced costs of investing due to economies of scale; and diversification, to name just a few.
That final upside – diversification - refers to the ability of funds to manage risk by spreading investors’ money across a wide range of companies, sectors and assets. So if one type of asset or company is falling in price, there could still be money in investments that are performing better.
Investing through funds is not without risk however. Fund investments can still go down as well as up and there is still a risk you get back less than you put in. For ‘open-ended’ funds there’s also the potential you won’t be able to get access to your money exactly when you want to. While rare, when this does happen – as has recently been the case with the Woodford Equity Income Fund – it can be very stressful and inconvenient for those affected.
Looking beyond the legal structure of a fund, there are myriad different investing strategies a fund may follow. The options – not all of which are mutually exclusive - include:
If you’re new to the idea of fund investing, you can see there is a huge amount of choice. It will take a bit of research to identify the most suitable funds for you and understand what the different approaches actually do.
Investment platforms such as Alliance Trust Savings and interactive investor are a good place to start, giving you access to resources that will help you understand what different funds do, how they perform, what they invest in, how much risk they take and how much they cost, among other features.
In particular, look for the Key Investor Information Document or Key Information Document for any fund you might be interested in. It’s there to give you essential information about the fund and is something you should always read before deciding to invest.
This is provided for general information only and takes no account of personal circumstances. It is not a recommendation to buy or sell. It is provided solely to support you in making your own investment decisions. If you have any doubts as to their suitability you should seek expert advice. Alliance Trust Savings does not give financial or investment advice.
Please be aware that the value of investments can fall as well as rise so you could get back less than you invest. Past performance is not a guide to future performance.
Alliance Trust Savings Limited is registered in Scotland No. SC 98767, registered office, PO Box 164, 8 West Marketgait, Dundee DD1 9YP; is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, firm reference number 116115. Alliance Trust Savings Limited gives no financial or investment advice. ‘Alliance Trust Savings’, ‘ATS’ and 'AT Savings' are all brand names of Alliance Trust Savings Limited together with the ‘Alliance Trust Savings’ logo are owned by and used with the permission of Alliance Trust PLC, the previous owner of Alliance Trust Savings Limited. Alliance Trust Savings gives no financial or investment advice.