Markets offer a dizzying and exciting range of investment opportunities, ranging from single niche robotics company stocks to wider, industry focused funds. As a new investor, it’s normal to wonder where you should start. In this article, we profile the differences between single stocks and funds, before showing you how they can fit into your new investment strategy.
Let’s start with stocks. Once you own a stock, you become a part-owner of that company. For example, if you buy a Unilever stock, you become a part-owner of Unilever.
A fund is a basket of stocks that can contain hundreds or thousands of different companies. Different funds tend to focus on different areas of the market, perhaps along a specific sector such as technology, or perhaps dedicated to a specific company or region, such as Asia. You can buy into funds that are offered by different financial services companies.
An ETF is an exchange-traded fund. This is essentially a basket of securities that is traded on the markets. These investment opportunities follow an index, such as the FTSE100, or have some other specific set of guidelines that they follow.
When deciding which stocks or funds to invest in, the most important thing is to make sure you pick a range of companies, industries, and countries that you are investing in.
In doing so, you’ll be spreading the risk that you are exposed to. For example, if you invest all of your money into a single stock or into a single country, you’ll be heavily affected by things that happen to impact those particular investments. If, on the other hand, you’ve spread your risk across different holdings, you’re less likely to be negatively impacted by one underperforming stock or fund.
ETFs can be a great option to help you diversify as some offer broad exposure to a diverse range of stocks. This is potentially less risky than putting your money into individual companies.
“Never test the depth of the river with both of your feet.” - Warren Buffett, Billionaire Investor
Typically it’s best to start with a few funds and ETFs, and perhaps one or two single companies that you really believe in. It’s important to note that if you invest in a single company it could dramatically impact your portfolio, while if you invest in the company via a broad-ranging ETF, you’ll be less impacted by any negative performance around that single stock.
We believe it’s important to focus on the long-term, so we recommend only investing where you believe the holding will still be performing well in the long-term future.