Funds vs Shares

Contents:‍

- What are funds? What are shares? The difference

- Risk vs return

- Diversification - funds

- Invest in what you believe in - shares

Intro

When it comes to investing in the stock market there are primarily two ways to invest - funds and shares. Fortunately, Wombat offers both.

Both have pros and cons and the best option for you will depend on various factors that we will explore in this post. You could even invest in both funds and shares if you please. The great thing about investing is that there is a lot of autonomy and the choices you make are ultimately personal preference.

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Stock Market Makeup

The world is made up of companies. These companies have employees and offices, make products and services, are trying to survive and make money.

When a company is first started, it is normally funded privately. In order to raise money, companies can IPO and make their shares available to the public to buy and sell. This is when a company becomes 'listed' on a stock exchange.

For example, Tesla is listed on the NASDAQ and Weatherspoons is listed on the London Stock Exchange. At this point, everyday people like you and I can then buy their stock. This means we can start to own a share of Tesla or Weatherspoons. Even if we have one share, we are now technically a shareholder in the company.

There are thousands of listed or 'public' companies in every corner of the world. Inevitably, some succeed and grow over time, others go bankrupt and fail.

Funds then group these individual companies together. Carrying on with the above example, imagine if you could invest into a fund that invested into Tesla and Weatherspoons. Instantly, you would now be more diversified as you're investing into two companies, one in the electric vehicle industry and one in the hospitality industry.

Just like there are thousands of companies, there are also thousands of funds. Some funds track entire countries, like a FTSE 100 fund that tracks the largest 100 companies in the UK. Some funds track specific industries or niches, just like Wombat offer The Blockchain that tracks blockchain related companies and The Green Machine that tracks environmentally friendly related companies. Some funds track specific types of companies, like high dividend-paying companies or smaller sized companies.

This is the makeup of the stock market and how individual companies can be pooled together to create funds.

With funds we can then dig a bit deeper. There are index funds that simply track an index, like the FTSE 100 or the S&P 500 (the largest 500 US companies). There are active funds that have a manager trying to pick individual stocks to generate higher returns than an index fund. Similarly as with funds and shares, you can invest into index funds, active funds, or both.

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Risk vs. Return

Shares are inherently more risky, but have the potential to generate higher returns.

We call this volatility. Shares are much more volatile than funds, because you're investing into one individual company. If you have 100% of your money in Tesla, then your investment returns will depend on how well Tesla performs.

Often, one news article or one piece of press can instantly move a stock price up or down. If there's news that Tesla are going to miss their revenue target due to issues in the supply chain then this is likely to negatively impact the stock price.

With shares, capital loss is much more likely. This is simply the nature of starting a company. Most companies fail in the first few years, even big companies can fail, remember Woolworths or Blockbuster?

As Warren Buffet famously said, when it comes to investing 'Rule number 1: Never lose money. Rule number 2: Don't forget rule number 1.'

On the other hand, funds generally offer lower future returns. This is because you're investing into many companies, reducing your volatility, rather than investing into one individual company. However, because of this the risk is also lower. This trade off means that we're more likely to be able to follow Buffett's famous two investing rules.

Through Wombat's platform we are able to invest into both shares and funds, so you can use these options to craft a portfolio that suits your risk preferences.

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Diversification

Shares are inherently more diversified. If you are investing into the S&P 500 you are owning Tesla and the largest other 499 companies in the US. So if Tesla performs poorly then you have another 499 companies to fall back on.

If worse comes to worse and Tesla goes bankrupt, ceasing to exist, whilst your S&P 500 fund may take a hit you won't be wiped out. If you had 100% of your money in shares of Tesla then you would've been wiped out. This links back to risk vs. return, shares offer higher future returns but also more potential risk.

On Wombat's platform you can invest directly into Tesla by buying shares, but you can also invest into Tesla indirectly by investing into The Battery Boom, for example, which includes Tesla and 10 other companies.

Diversification is something that splits opinion. Some say people only diversify if they don't know what they're doing. Others say diversification is a must and we shouldn't put all of our eggs in one basket. Once again, there is no right or wrong, but something to think about as it may impact your investing strategy.

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Cost

With shares, you usually only incur costs when you buy or sell. Hence, if you buy a share and then hold for decades, you would've only incurred buying costs on the initial buy.

With funds, you will incur an 'ongoing expense fee', which is essentially an annual fee that you pay for investing into a fund.

In this sense, unless you're buying and selling shares regularly, funds will usually incur more fees over the long term due to the annual ongoing expense of the fund.

Neither is better or worse, right or wrong, but costs are important.

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Hands Off

Funds are much more hands off. You invest into a basket of stocks, which may be 10 companies or maybe 1,000 companies, and hopefully watch your money grow over the years. Due to the volume of companies in funds it can be impossible to track them all, which is why you can simply leave your money invested. One example on Wombat is the All American fund that includes 23 American companies.

Shares are much more hands on. Remember, when it comes to investing your hard-earned money you want to look after it. Few people would drop £500 on an impulse purchase, but many people drop £500 on an impulse share that their mate recommended down the pub. If you are investing into shares then ideally you need to be staying on top of the company's recent news, looking into their 'numbers' or their financial statements, trying to build a story of why company X is a good place to put your money. Wombat offers a selection of shares across a number of industries including Fashion, Sport and Technology, but it's important to understand why you want to invest into a company.

In this sense, funds are a much more convenient and hands off way to invest. As mentioned above, in Wombat's All American fund you can invest into 23 companies. That's instant diversification and an investment you can hopefully contribute to regularly and watch it grow over time with little work or regular checkups.

Shares requires more maintenance and are more hands on, which is something to be aware of.

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Conclusion

Ultimately, and the great thing about investing, is that what you want to invest into is completely personal preference.

You may choose to be 100% in funds, this could be one single fund or several different funds. You may choose to be 100% in shares, this could be one or many shares. You may even choose to allocate your money between funds and shares. Fortunately, Wombat offers both funds and shares so we are able to allocate our money as we please between funds and shares.

From my experience, many investors like the final approach. Funds are steady and generally lower risk, making up the backbone or core of a portfolio. Investors can then add shares on top, from companies that they believe in or use themselves, to make up the remainder of their portfolio.

That's a brief introduction to funds vs shares!