How to Choose Between Stocks and Index Funds
For those looking to get started investing in the stock market, you will come across the pros and cons of individual stocks versus index funds. Stocks are stocks of a company, while index funds are a portfolio of stocks and bonds that tracks the stock market.
Many people avoid the stock market out of fear, but learning how it works can help you make the right choice to reduce your personal risk. Here are the basics on how index funds differ from individual stocks and how you can choose the right investment vehicle for your money.
The difference between stocks and index funds
The biggest difference between investing in index funds and investing in stocks is risk. With shares, you own one stake in one company. With an index fund, you indirectly own shares in a number of different companies that make up a particular index, such as the S&P 500 or Nasdaq 100. This gives you a more diverse portfolio—one that rises and falls with entire sections of the index. market.
Compare this to individual stocks, which tend to be more volatile and can have sharp ups and downs. The diversified nature of an index fund usually means fewer extremes. This, of course, means less reward, but also less risk.
Invest in stocks, not index funds
For some, the disadvantage of index funds is the lack of control over your specific assets. When you invest your money in S&P 500 index funds, you cannot customize individual stocks and can only earn average returns. Many individual investors seek personal satisfaction from playing the stock market: index funds are not an exciting way to “beat the market” ( we do not approve of this pursuit).
Of course, anyone who buys stocks knows that it’s better to build a comprehensive portfolio than to put all your eggs in one basket. This is why for most people, especially first time investers, index funds are a good starting point. Index funds can take the stress out of picking certain stocks, and they usually cost a lot less than other investment vehicles. From there, you can start learning how to pick individual stocks – perhaps with the help of a financial advisor .