Should You Invest in the Stock Market Directly or Through Investment Funds?
A look at the pros and cons of the two investment methods, and how investment funds have enabled individuals with less capital to become involved in trading.
You can invest in the stock market directly, meaning when you decide when, how much, and in what way you invest.
For that, you need to have experience in trading on the stock market, the necessary information on market developments, a short-term and long-term strategy, the necessary accounts and trading tools, and most importantly - investment assets.
You can also invest in the stock market through investment funds, which is much more comfortable.
Investing in the Stock Market or Not
This has become a rhetorical question these days. Investing in the stock market is the best way to fertilise your capital and finally make your capital work for you. However, it’s necessary to know how to invest directly in the stock market, and to approach it extremely carefully and only after generous preparations.
If you don’t have the necessary knowledge to be able to invest in the stock market on your own, the best option available to you is through investment funds. Anyone who engages in trading on the stock market and doesn’t have the necessary knowledge is doomed to failure, and even worse - will lose all their invested money.
About 80% of trading on the stock market is done by insufficiently professional traders. That’s why there’s always a great opportunity to make money on the stock market.
Direct Investment in the Stock Market
Direct investment in the stock market means that investors independently hire brokers to whom they give instructions for buying or selling items with which they want to trade on the stock market. They are offered many opportunities: from trading the best shares in the UK, raw materials, derivatives (financial), currencies, cryptocurrencies…
In this sea of offers, investors need to decide what they want to trade with because each of these products requires a different tactic, parameters, trading rules, etc.
In addition to this, it’s necessary to decide the dynamics of trading. This refers to the dynamics with which they want to monitor changes in the stock market. From changes at the level of seconds to changes at the level of days, weeks, or months. The faster the dynamics, the greater the knowledge and self-control required.
Direct Investment Costs
Investing in the stock market isn’t cheap. In addition to the funds you’re willing to invest, it’s necessary to take into account the investment costs, which aren’t small at all. They are different in relation to the amount of planned investment, trading dynamics, conditions under which you start investing…
The most common costs to count on are the cost of opening a trading account, the cost of a broker, the cost of the stock market, the cost of buying, the cost of selling, the cost of taxes, and the cost of withdrawing funds. All of these costs can take away the profits you make through trading, and it’s extremely difficult to make a net profit.
And note: direct investment isn’t recommended for so-called “small“ investors.
Investing in the Stock Market Through Investment Funds
Investing in the stock market through investment funds is truly the most comfortable way to invest. The investment fund, as a collective investment institution, is designed to help “small“ investors to participate in world markets under the same conditions as “large“ investors. Funds of investment fund members are collected and invested under previously agreed conditions (investment fund prospectus).
The costs are calculated as if invested by one investor and are divided among the members of the investment fund. This reduces investment costs and most of the funds are invested.
Advantages of Investing Through Investment Funds
Investing in stock markets through investment funds has many advantages over direct investing. Let’s list some of them:
- Reducing investment costs
- Provided professional investment management by portfolio managers
- Monitoring market movements by consulting firms
- The possibility of investing in several types of products
- Portfolio diversification by industries, currencies, and geographical diversification
- The ability to choose the risks you want to accept
- Constant control of your investment
- Maximum liquidity of funds
- Cost-benefit transparency
Reducing Investment Risk
The risk of investing in the stock market is always present. We can’t avoid it but we can define and diminish it.
- Defining risk means determining exactly how much risk you’re willing to accept, and therefore how much profit you expect from your investment.
- Risk reduction is achieved by diversifying investments, while the risk is higher if you’ve invested in a smaller number of products.
If you want low risk, you’ll invest in a money market fund, which invests only in bills, bonds, bank deposits, and the like. If you’re willing to accept a higher risk, you’ll look for a balanced fund, which invests part of the money in bonds and part in shares.
For investors who accept even greater risk, the chosen fund is an equity fund. For investors who want a high level of risk, the right choice are hedge funds, Forex, and cryptocurrencies.