When you invest in the stock market, it’s always a good idea to diversify your portfolio.
“Diversifying” means spreading out your risk by investing in a broad range of shares, bonds, mutual funds, and exchange-traded funds across different sectors, industries, and even countries.
Before you start investing though, it’s important to know what these things are. So, what is the difference between our Shares (stocks) and our Themes (funds)?
When a company goes public through a process called an “initial public offering”, it issues what are known as shares, or stocks. Shares represent partial ownership in a company, and the public can buy individual units of the company. These shares represent a claim on the company’s earnings and profits.
To put it simply – buying a share is buying a small percentage of the company, and upon doing so, you become a shareholder or partial owner of the company!
Since an individual share represents partial ownership of one specific company, when that company has a great year with strong revenue and profit, the company’s value will go up – and so will it’s share price. This means that a share you may have bought for £100, could now be worth £110 – you’ve thus made a £10 return on your investment.
However, if that company had a bad year, with reduced revenue and profit, this can also be reflected in its share price, which may then decrease in value – so your initial £100 investment may now only be worth £90.
In short, when your portfolio only consists of shares from one single company, you’re placing all of your eggs in one basket. Your potential returns are tied completely to that one company’s success and will rise and fall with the company. Your investment is entirely dependent on the individual company’s performance – it can have big gains or big losses, even in the course of a single day.
At Wombat, we’ve called the funds we have on offer “Themes”, because we’ve hand picked curated funds that fit into specialised themes (such as the Techie, or the Foodie) that make it easier for new investors to know what they’re investing in, and for experienced investors to personalise their portfolio by targeting specific industries they want to invest in.
Funds are among the most popular investments out there. There are many different kinds of funds: Mutual funds are one example, Exchange-Traded Funds (ETFs) are another, Index funds, which can be either mutual funds or ETFs, are yet another.
Our Themes consist of a bundle of shares from many different companies, in contrast to just one individual company. In other words, instead of investing in a single technology company, such as Microsoft, you might instead invest in a Fund with a technology focus, like with ‘The Techie’ – when you invest in The Techie, you’re investing in Microsoft, but also Apple, Google, Facebook, Tesla, Adobe, T-Mobile… Just to name a few!
The benefit of investing in a fund is that it helps you to diversify and spread your investment risk. So, rather than just owning shares in one company in a particular sector, you could potentially own shares in hundreds of companies within that sector. If one company is having a bad year, its performance can then be balanced out potentially by dozens, or even hundreds, of others that are doing well.
Going back to our example above, where you invested £100 into one company which then had a bad year and so the share price dropped to £90 – if instead you’d invested that £100 into a Theme consisting of 10 companies, even if one company had a bad year, the other 9 companies could all still have great years and the value of your investment can still rise.
In other words, when you invest in a Theme, which consists of many, many companies, you’re using the collective strength of the group of companies to protect yourself against the losses of the minority, and thus greatly increasing your likelihood of making a return on your investment.
We chose Themes because they focus on sectors or industries like hospitality, commodities or even health care. Other types of themes can instead invest strategically. For example, they can be aggressive in an attempt to give investors bigger returns, or conservative, in hopes of providing investors income over longer periods of time, while lowering the risk of losses. They could also invest in large, small, or medium-sized companies across different categories such as revenue growth and value, or in companies from different countries.
A mutual fund takes money from individual investors and invests it in a basket of stocks. Something called the “Net Asset Value” of the fund is determined at the end of each day, and investors buy and sell units of the fund based on this value.
An ETF is also a basket of funds that sells shares, but investors can trade in and out of it throughout the day, based on the fund’s share price. ETFs also typically invest in companies represented in an index (mutual funds can also be index funds.).
You can’t invest directly in an index, which uses a collection of stocks to gauge the performance of the stock market (or a sector of the stock market) over time. Examples of an index are the S&P 500, and the Dow Jones Industrial Average.