When it comes to investing in stocks, most people predominantly rely on mutual funds. Mutual funds are a type of professionally managed investment pool that allows you to cast your lot along with thousands of other investors at the same time. Mutual funds are a truly wonderful way for you to instantly diversify your portfolio without putting a large investment in. Some investors, however, may want to venture outside of the world of mutual funds, buying individual stocks as well. If you fall into this group of adventurous investors, keep the following information in mind regarding buying and selling stocks.
There are numerous advantages to buying an individual stock rather than investing in a mutual fund. Here are some of the reasons for why you may like to purchase an individual stock rather than investing in a mutual fund, including higher potential for returns and lower taxes. Keep in mind that there are also disadvantages that need to be considered, however.
- * Higher Potential for Returns: Mutual funds may be great, but they tend to preclude any possibility for high returns on the money that you invest. Since they typically involve owning hundreds of stocks, you have to pick huge winners in order to really make a difference in the performance of your mutual fund. Buying into an individual stock is completely different, as one stock performing well can have huge profit implications.
- * Lower Tax Potential: Mutual funds have to distribute their gains to investors when each year ends, and this can lead to a large tax bill regardless of whether it is wanted or not. You are going to owe taxes on any and all gains, even if the fund lost money on an overall basis. Buying individual stocks is not like this, though, so the tax potential is potentially much lower for you in the end.
We cannot forget the disadvantages that are associated with this type of investment, though, because no investment is bomb proof and stocks are no exception to this rule. Buying individual stocks has two primary risks or disadvantages associated with it. First and foremost, since you are not as diversified there will be more risk. Second of all, while this is not always the case, buying individual stocks tends to be more expensive than if you were to simply pay a mutual fund manager to do it for you. If you want to justify this additional expense you need to be willing to be confident in your ability to receive returns that are above average.
Buying individual stocks and investing in mutual funds both have drawbacks and advantages that are associated with them. It is vitally important that you weigh all of your options before you settle on one investment opportunity over the others that are available to you. Keep this in mind when investment opportunities come up and you should be fine.
Photo Credits: epicharmus
Originally posted 2009-07-27 05:57:29. Republished by Blog Post Promoter
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