Investing in the stock market has been a path to both riches and financial calamity. It has always been a mysterious place to invest but that mystery also makes it fascinating.
In this article we look at five practical ways to invest into the stock market and highlight the advantages and disadvantages of each option.
1. Buy stocks directly through a stock broker
Using a stock broker has been the traditional method of investing directly into the stock market. There is usually a high minimum financial requirement for the purchase of each stock. The stock broker will provide advice and guidance, however, you will have to accept the consequences of any stock the under performs.
- Brokers can be a good source of information
- Buying stocks directly gives you a sense of ‘control’
- The ability to buy and sell quite quickly
- The stock broker can act as a good sounding board
- Difficult to diversify your investments unless you have a substantial amount of funds to invest
- You might end up with a poor stock broker
- As most stock brokers receive fees (commissions) by each transaction, they may encourage you to trade (buy and sell) shares. This might not be in your best interests
- Fees charged are usually quite high compared to an online stock broker
- Paperwork can become onerous, especially at tax time.
2. Buy stocks directly through an online stock broker
Using online brokers has become very popular. In Australia, Comsec have become very successful at attracting ‘mums and dads’ to invest directly into the stock market. Online stock broking businesses put you in the driving seat. They will provide a significant of information through research papers but make no mistake about it, the decision to buy and sell will be yours and yours alone.
- A cheap and easy way to invest in the stock market
- Ability to track your stocks online – you just need an Internet connection
- Research papers can be very good and easy to access.
- Can be difficult to build a diversified portfolio without substantial investment funds
- You have to make the decisions
- Paperwork can be difficult especially at tax time
- Reliance upon the Internet and other technology. When it fails, it tends to do so at the worst possible time.
3. Buy directly from a financial planner
Financial planners can also be registered stock brokers but most work in-conjunction with a ‘panel’ of stock brokers. This means the financial planner will review stock brokers and appoint their preferred selection to work for their clients. This means the financial planner is dealing with a select group of brokers as opposed to relying upon just one.
- The financial planner will provide advice for your total portfolio of investments, not just the portfolio of stocks
- Stock brokers will be aware that the financial planner is watching and comparing each broker – creates good competition
- The financial planner gets to see a full range of recommendations from the panel of brokers – makes it easier for him/her to question each recommendation
- Administration of your stocks can be included as part of the service, making it easier at tax time.
- Fees can be a little higher as the planner and stock broker need to be paid
- You may not feel like you are in full control as the financial planner acts as a filter between you and the stock broker
4. Buy stocks through a managed (mutual) fund
This has been a very common way to make a start in the stock market. There is a great range of managed funds that offer a broad mix of stocks that can be accessed at a low price, when compared to buying a broad mix of shares directly. You can also purchase a number of managed funds to create greater diversification. Most managed funds are purchased from a financial planner.
- The ability to buy a diversified portfolio at a low cost
- You can purchase a fund that has specific goals. For example, buy a fund that aims for growth, or buy a fund that creates dividend income
- Paperwork is reduced as you get one statement from the fund manager
- Professional fund managers aiming to achieve specific goals.
- Funds can have expensive on-going management fees as there are often several layers of fees. For example, the fund managers, the administrator and the financial planner all want to be paid
- Some of the marketing can give a wrong impression – read the fine print
- A lack of transparency – You don’t always know what is going on in the fund.
5. Purchase Exchange Traded Funds (ETF)
Exchange Traded Funds (ETFs) are similar to managed funds. The main differences being that you can purchase them directly, just like buying stocks. Another difference is that the funds are not specifically managed, they are managed to ‘track’ a benchmark. For example, they follow the overall return of the ASX 200 or S+P 500. This means they are automated and in-turn, cheap to administer.
- Cheap access to a portfolio of stocks
- Reduced paperwork compared to a portfolio of stocks
- Easy to purchase a mix of ETFs to create a very diversified portfolio (risk reduction)
- The best you can do is achieve the benchmark – no room for out performing the broader stock market
- They are meant to be simple investments but some can be very complex – read the fine print before you invest.