Should you invest in shares or funds?

Understanding investment options

Investing in the stock market can be a great way to grow your wealth over time, but it’s essential to understand the different investment options available.

Stocks, bonds, ETFs (Exchange-Traded Fund), MMFs (Money Market Funds) and other mutual funds are popular investment options, each with its own unique characteristics and risks. Stocks represent company ownership and offer long-term growth potential, while bonds provide regular income and relatively lower risk. Mutual funds, on the other hand, allow you to diversify your portfolio by pooling your money with other investors to invest in various assets.

When considering investment options, assessing your financial goals, risk tolerance, and time horizon is crucial.

Are you looking for long-term growth or regular income?

Are you comfortable with taking on more risk or do you prefer more conservative investments?

Understanding your investment goals and risk tolerance will help you make informed decisions and choose the right investment options for your portfolio.

How the stock market works

The stock market is a platform where companies raise capital by issuing shares to the public, and investors buy and sell these shares in hopes of earning a profit. Various factors influence the stock market, including global events, politics, and economic conditions. Stock prices can fluctuate rapidly, and market volatility can be unpredictable.

To navigate the stock market, it’s essential to understand how it works.

Stocks are traded on stock exchanges, such as the Nasdaq Baltic stock exchanges, which provide a platform for buyers and sellers to meet. Stock prices are determined by supply and demand, and market forces can cause prices to rise or fall.

As an investor, staying informed about market trends and news that may impact your investments is crucial.

How to minimise your investment risk

You’ve left your money to tick over in a savings account – but now you’re ready to leap into investing.

The performance of different investment options over the past year can vary significantly, making it essential to analyse annual returns and trends.

So, where do you start? Should you buy company shares or put them in a fund instead?

If you’re not sure, don’t worry. We’ve weighed up the pros and cons of choosing your own shares versus investing in funds so you can decide what’s right for you, and how much investment risk you’re willing to take.

Buying individual investment shares

If you buy shares in a company, you’re buying a slice of that company. It’s likely to be a small slice to start with – but it means you could get a share of its profits.

This profit share is called a dividend. In addition to the possibility of regular income in the form of dividends, the value of the shares could rise if the company does well.

So, if you pick the right company, you can do very well by buying individual shares. But not every company performs so well. Even household names can have a bumpy ride.

The main risk is that you invest in a company that doesn’t do well or whose shares fall in value when you need to cash in – primarily if you’ve invested a chunk of your savings.

Investing in funds

Rather than buying shares in an individual company, funds invest in a collection of companies, debt instruments, government bonds, cash and other assets like property.

Certain funds focus on specific sectors, such as technology or healthcare. Others only consider companies of a certain size or in a certain country or region.

If you invest in an investment fund, you’re spreading your money and reducing the risk of a single company performing badly.

There are hundreds of share-based funds, some with similar outlooks and near identical names.

But they all fall into one of two categories.

Active or actively managed funds

A fund manager or team decides which companies to invest in, which shares to sell, when to trade and how many shares to buy and sell.

It’s a hands-on system in which experts research and decide on what they think will have the right mix of risk and return.

Passive or market (index) tracker funds

The aim here is to mirror the performance of a stock market index, like the FTSE All-Share.

A fund tracking the FTSE All-Share would buy all 600+ shares in the same proportion as the index—then buy and sell to maintain the right allocation between them. The British (or are they Estonian?!) company Wise Plc is listed on the London Stock Exchange.

Alternatively, a fund tracking the S&P 500 would buy all 500 shares in the index and then buy and sell to keep the right allocation balance.

Shares and funds compared

Whether you should invest in company shares directly or via an investment fund will depend on several factors.

How much risk you feel comfortable taking

There’s no getting away from it. Share prices go up and down, and companies—even the big ones — go bust from time to time.

Picking a single or small number of companies and buying shares in them can be risky because you’re putting your eggs in one or a few baskets. So, if you want to take on less risk, you may want to invest in share-based or equity funds.

This can be less risky, especially if your money is spread across several different funds or your fund is spread across many different investments.

How involved in your investments you want to be

Many people enjoy checking the performance of their shares in newspapers or online—it’s like following their favourite sports team.

A shift of just a few percentage points could earn or lose you thousands, depending on the size of your investment. Just think of the feeling of a last-minute winner – or a last-minute defeat.

If you don’t want to monitor your investments closely, buying shares in individual companies is probably not for you.

But even if you invest in funds, you should still regularly review how your investments are doing.

How much you have to invest

You can start investing with several providers with just a tiny amount of money. You can make regular monthly payments and pay in lump sums whenever possible.

But remember to only invest what you can afford to commit to for longer periods. This is generally the best way to smooth out the short-term ups and downs in the stock market.

Costs and charges

You may have to pay fees to buy and sell shares, known as ‘stockbroking fees’. The cost varies depending on the stockbroker you use.

With funds, the charges are typically a percentage of the money you’ve invested – and they’re taken out of the money you invest. The percentage will depend on the type of fund you invest in.

Heads up. Whether you’re investing in shares or funds, gains realised through the sale of your shares or funds are potentially liable to Income Tax depending on your personal circumstances – unless you’re investing within an investment account or pension.

Upon investing in securities, a natural person can choose:

• an ordinary system whereby the sale and exchange of securities must be declared in the income tax return and income tax must be paid on the income earned;
• an investment account, upon the use of which contributions and payments must be declared on the income tax return, but the payment of income tax can be postponed; and
• pension investment account (II pension pillar), which is not declared in the income tax return, because payments made from pension investment account are taxed on the basis of the rules of the II pension pillar.

Getting started with investing

Getting started with investing can seem daunting, but it’s easier than you think. The first step is setting clear financial goals and determining risk tolerance. Next, consider opening a brokerage account with a reputable online broker, giving you access to various investment options.

When selecting investment options, consider starting with a diversified portfolio of stocks, bonds, and mutual funds. You may even prefer other alternative investments. A diversified portfolio can help spread risk and increase potential returns. It’s also essential to educate yourself on investing and stay up-to-date with market news and trends.

Monitoring and adjusting your investments

Once you’ve invested, you must monitor your portfolio regularly and adjust as needed. This involves tracking your investment performance, rebalancing your portfolio, and changing your investment strategy.

Regular portfolio monitoring can help you identify areas of your portfolio that may need attention.

Rebalancing your portfolio involves adjusting your asset allocation to align with your investment goals and risk tolerance. By monitoring and adjusting your investments, you can ensure your portfolio remains on track to meet your financial goals.

Common investment mistakes to avoid

Investing in the stock market involves risk; even experienced investors can make mistakes. Common investment mistakes to avoid include putting all your eggs in one basket, failing to diversify your portfolio, and trying to time the market.

Diversification is key to managing risk and increasing potential returns. By spreading your investments across different asset classes, sectors, and geographic regions, you can reduce your exposure to any one particular investment. Additionally, trying to time the market can be costly, as it’s impossible to predict market fluctuations with certainty. Instead, focus on long-term investing and avoid making emotional decisions based on short-term market volatility.

We hope the information in this article is useful, but it isn’t financial, personal or tax advice. You should speak to an Independent Financial Advisor if you want expert advice. Remember, the value of investments can go up and down, so you may get back less money than you put in.

You should consider investing as a medium—to long-term commitment, so be prepared to invest your money for at least five years. Tax depends on your individual circumstances, and regulations may change in the future.