Let’s face it – when we hear people talking about stock markets and stock funds and other kinds of investments, it can get a little bit confusing. Like anything else, it’s not really as complex as it appears. Arming yourself with some fundamental knowledge can help you understand investments, and perhaps even take the first steps to investing your money. One of the most common confusions with investors, for both beginners and the more experienced, is the difference between stocks and stock funds.

What Is A Stock?

Stocks give you a share of ownership in a particular business. For example, you can buy a share in Coca Cola. This means you own a very small part of the Coca Cola business.  If Coca Cola makes a huge profit, you get a share in these profits – albeit a very small share. The amount will be proportional to the number of shares you bought and still hold in your portfolio. If you sell your shares before the company distributes its profits you will not get a share of this bottom line performance. On the other hand, if Coca Cola loses money while you own a share then you are likely to lose money as the equity price will go down. The price may fall below the level at which you originally bought.

There are various types of stocks for you to invest in as there are many different types of companies to choose from.  Examples include different sized companies – such as large company stocks like Coca Cola (which are known as large cap), mid cap and small cap stocks. “Cap” is short for capitalisation and this is the value of shares the company has listed on the market. You can also choose between stocks from different sectors and industries – such as technology stocks, financial stocks or those from the food and drink industry such as Coca Cola.

Risks Of Stocks

Investing in equities can be risky as prices can go up as well as down. You risk losing the entire amount in each equity investment. For example if you bought S$100 worth of Coca Cola shares and if they ever go bankrupt, the maximum amount you will ever lose is S$100. This is why it is not a good idea to put all of your money into one single equity investment.

To provide variety and diversification to your investment portfolio you might choose to invest S$100 each in, for example, twenty different stocks – but we don’t always have enough money for this to be possible or worth our while. Each time you buy a share and sell a share you have to pay a fee and this can end up being expensive.  Also having lots of individual holdings can be more difficult and time consuming to monitor.

How Stock Funds Can Help You

Given these concerns a stock fund can be a more practical and effective choice for your money. How a stock fund works is that a financial institution will take some of the hard work out of investing for you. They will apply their knowledge, experience and research skills in investing in large amounts in a variety of equities. They manage a large equity portfolio on behalf of a larger group of investors – people just like you and I.

By pooling together investor money, the managers of these stock funds can benefit from economies of scale – such as through lower transaction fees. Before you hand over any of your money you should research the credentials and style of the stock fund. Some stock funds concentrate on investing on a particular style of equities – such as those stocks that pay better dividends. Other stock funds might focus on equities from one country or geographic region, or on a particular segment of industry.

The stock fund will create a brochure and publish a list of their investments so you can see where your money will be invested. As an example, a stock fund may invest in 25 technology stocks from across the globe. You essentially buy shares in the fund rather than the individual stocks. This means that you can use your S$100 to buy shares in the stock fund and this will give you a smaller share in all 25 tech stocks.

The managers who run the stock fund will have a lot of experience choosing and managing stocks and will better protect your money from market risks. They will charge a small fee for their services. However, the benefits of investing in a stock fund far outweigh the costs involved in the majority of cases.

Bottom Line

Overall, investing in stocks and stock funds can generate positive returns in the long run.  There are risks involved but if you are able to invest your money over the long term horizon you are likely to see high returns on your money compared to other types of investments.

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