
Should an Investor invest in individual securities or use funds?
Stock closed-end funds offer investors the opportunity to invest in
diversified portfolios of different sectors of the economy and foreign
countries, just like mutual funds. The advantages of both closed-end
funds and mutual funds are the use of professional management,
diversification, the freedom to invest small amounts of money, and
the ease of buying and selling. For many investors, these advantages
far outweigh their disadvantages. Decisions of which individual
stocks to invest in are avoided by choosing equity mutual funds and
closed-end funds.
An advantage of a closed-end fund over a mutual fund is that
closed-end funds can trade at a discount to their NAVs. This is
akin to buying a dollar’s worth of assets for less than a dollar. This
strategy appeals to value investors, who have the patience to wait
for the assets to rise in value.
Mutual fund managers can experience liquidity risk from
excessive sales of shares by shareholders. Fund managers would
have to sell some of their stock holdings to raise enough cash to be
able to redeem the shares sold by shareholders. This does not happen
in closed-end funds, allowing their managers to invest in less liquid
investments, such as real estate and foreign company shares.
Investing in individual stocks and closed-end funds allows
investors to choose their purchase and selling prices during the
trading day. Mutual fund transactions are enacted at the NAV price
as of the close of the trading day. Similarly, there are no minimum
investment amounts stipulated with closed-end fund investments
as there are with mutual funds. An investor can buy or sell a single
share or in round lots of shares.
However, in certain cases, a strong argument exists for buying
individual securities over mutual funds and closed-end funds.
Returns on individual stocks could be greater than those earned
from mutual funds and closed-end funds owing to fees charged by
the funds. This statement is true even for no-load funds because in
place of sales commissions, other fees, such as 12(b)–1 and management
fees, reduce the returns of mutual funds. By investing in
individual securities, you avoid these fees. Closed-end funds do
not charge 12(b)–1 fees, but management fees can be high.
Investing in mutual funds and closed-end funds is a good
strategy if you do not have enough money to diversify your investments
and do not have the time, expertise, or inclination to select
and manage individual securities. In addition, a wide range of
funds offers you the opportunity to invest in the types of securities
that would be difficult to buy individually.
Table 15–4 compares some characteristics of investing in individual
securities versus mutual funds and closed-end funds.
|
Individual Securities |
Mutual Funds |
Closed-End Funds |
Diversification |
Achieved only if a large
number of securities
is purchased |
Achieved with
a small
investment |
Achieved with
a small
investment |
Ease of buying
and selling |
Easy to buy and sell
stocks at real-time
prices during the
trading day. More difficult
to buy bonds |
Easy to buy and sell
shares. Trades
occur only at the
closing price at the
end of the day |
Easy to buy and sell liquid
closed-end funds |
Professional
management |
No |
Yes |
Yes |
Expenses and costs
to buy and sell |
Brokerage fees
to buy and sell |
Low to high expenses,
depending on
fund |
Low to high expenses,
depending on fund |
Tax planning |
Easier to predict
income and plan
capital gains and
losses |
Can upset careful tax
planning owing to
unpredictable distributions
of income |
Can upset careful tax
planning owing to
unpredictable distributions
of income and
capital gains |
|
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Categories in Trading Mistakes
|
Lack of Trading Plan Planning plays a key role in the success or failure of any endeavor
Using too much Leverage Determining the proper capital requirements for trading is a difficult task
Failure to control Risk Refusing to employ effective risk control measures can ensure your long-term failure
Lack of Discipline A lack of discipline can destroy even the most talented and best prepared trader
Useful Advices to Beginning Trader You can control your success or failure
All about Stocks Encyclopedia about Stocks. That you should know about Stocks before starting
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