Is It Better to Buy Individual Stocks or Funds?

The primary difference between a stock and a fund is that a stock is an investment in a single company, where as a fund has many different investments. Funds pool the resources from many different investors to buy lots of stocks and bonds.

There are several different types of funds available, but the most popular are mutual funds, ETFs (exchange traded funds), and index funds. Most investors opt to allocate most of their portfolio into funds, but buying individual stocks can still provide some great benefits. Lets dive into the pros and cons of each below.

Control over your investments

The first advantage of buying individual stocks is that you have complete control over your investments. You can decide what companies you want to invest in and make changes at the drop of a hat when you want to switch things up.

Affordable

Almost all online brokers and trading platforms allow you to buy and sell individual stocks commission free, which can make individual stocks a very affordable investment. Additionally, most brokers allow you to buy fractional shares of stocks. A fractional share allows you to buy just a portion of a stock and not an entire share.

Easy to buy

Stocks are now very easy to buy with the adoption of modern and clean interfaces from most brokers. You simply have to open an investing account, deposit your funds, and click a single button to purchase your desired stocks. There are even a variety of investing apps available so you can buy stocks on the go.
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Potential for big returns

Finally, buying individual stocks does offer the potential for big returns. If you take the time to properly analyze a company and buy their stock at the right time, it is absolutely possible to see very high returns on individual stocks.

Potential for large amounts of loss

Although you can see high returns from buying individual stocks, there is also the potential for large amounts of loss. The average investor does not have the skill required to consistently analzye and pick winning stocks.

Stressful and time consuming

Successfully picking a single stock could take hours upon hours to do. If you want to assemble a complete portfolio of individual stocks it could take days or weeks. The amount of effort, reasearch, and time it takes to choose individual stocks can often be very stressful.

Instant diversification

When you invest in a fund, you are automatically investing in all of the assets held by the fund which means you get instant diversification. Diversification can help hedge against the volatility of the market and provide stable returns over the long haul.

Less risk and less stress

Since funds offer instant diversification, they are less risky and cause less stress. This does not mean that funds don't ever lose value, but it does mean that you can be confident the fund will bounce back from the downturns and perform well over the long haul.

Potential for low cost

Many funds are affordable to invest in as they don't charge a large expense ratio or fee. Most of the funds that are affordable are passively managed. All this means is that the fund is not actively being managed by a professional. Instead these funds track the benchmark of a specific index such as the S&P 500.

Potential for high fees

Although there are a lot of funds that are affordable to invest in, there are also funds that have higher fees. The funds that have the highest fees are actively managed by investing and trading professionals. High fees can eat away at your overall return.

Less control over your investments

When you opt to buy individual stocks, you have complete control over what investments you do or don't want. This is not the case when you buy a fund. You are simply purchasing the investments held by the fund and don't get a say on what those investments should be.

May underperform individual stocks

In a short time period, it is possible that holding individual stocks could outperform a fund. Individual stocks can skyrocket in value in the short term, where as funds tend to focus on the long term performance of all the assets held within the fund.

Ultimately, both individual stocks and funds are good investment options, but the one you should focus on will come down to your individual needs, goals, and risk tolerance. Focusing most of your time on individual stocks can be quite challenging, which is why many investors opt to use funds to build their portfolios.

Funds are definitely the easier option as they provide instant diversification, and tend to provide stable returns over the long haul. If you are a beginner it is probably best to start with funds, and only allocate a small percentage of your portfolio towards individual stocks due to the higher risk. If you have not started investing you can check out our guide on how to start investing.