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Should you invest in individual shares or funds?

By:  Sean LaPointe | 3rd June 2021

You might have already heard that investing in stocks is one of the most dependable ways of creating wealth over the long term. But the stock market can be a relatively complicated arena with lots of different options. One of the decisions you will have to make as an investor is whether to invest in individual shares or in funds.

In this article, we’ll look at the pros and cons of each to help you make the best decision for your circumstances.

What is the difference between shares and funds?

A share is a unit of ownership in a company. If you own a share, you essentially own a little bit of the company and therefore a portion of its overall value. If the company grows and becomes more valuable, your share increases in value too.

A fund, on the other hand, is a pooled investment that contains shares in a collection of companies. Some funds also invest in other assets, such as bonds and property. When you invest in a fund, you basically receive a slice of everything included in the fund.

A fund can be actively or passively managed.

Individual shares vs funds: what are the pros and cons?

Individual shares

Pros

Cons

Funds

Pros

Cons

Individual shares or funds: which is the better investment?

There is no one-size-fits-all solution here. However, considering the following questions can help you make the best decision for your circumstances.

How much risk are you comfortable taking?

If you invest in funds, you will take on less risk as your money will be spread out over a range of different stocks or assets. The trade-off is potentially lower returns.

How involved in your investment do you want to be?

If you want to play an active role in choosing your investments, investing in individual shares might be a better option. You’ll get a chance to personally select the companies you invest in.

If you prefer a hands-off approach or don’t have the time, expertise or inclination to select and manage individual shares, then funds are probably a better option as you’ll get to buy many stocks in a single transaction.

How much money do you want to invest?

If you have a smaller amount of money to invest, funds might be the better option.

A £1,000 investment in a fund, for example, will buy you a fraction of a diversified portfolio of stock. With individual shares, this amount may only be enough to buy the shares of one company, exposing you to risk if the company underperforms.

Final word

When it comes to individual shares or funds, you don’t actually have to choose one or the other. If money isn’t an issue, both can be included in your portfolio to help you create wealth and meet your financial goals.

However, as always, do your homework first. Furthermore, only invest an amount that you can commit for the long term, as this is the best way to ride out the stock market’s inevitable short-term fluctuations.

Finally, whether you are investing in individual shares or in funds, consider investing within a stocks and shares ISA. This is a tax-free wrapper that shields your investment gains from tax, meaning that you get to keep more of your money.

Keep in mind that tax rules can change and that tax treatment depends on your individual circumstances.

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