Three Ways You Can Invest In Shares
Investing in shares is a great way to build wealth and create passive income over time. But how exactly do you do that? I’m going to go through the three different options you have when it comes to investing in shares
Individual shares
Investing in individual shares is where you buy a portion of a specific company, for example you buy a share or multiple shares in Coca Cola or Apple or Microsoft.
When you invest in individual shares you own the shares outright which allows you to vote in shareholder meetings and receive the dividends directly.
It is more challenging to build a diversified portfolio if you are investing in individual shares particularly when you are starting out. Firstly, unless you have tens of thousands of dollars it’s difficult to have a diversified portfolio straight away especially if you are dollar cost averaging into shares.
Secondly, it takes a lot of research and time to determine which shares to purchase and there’s a risk you take a bet on the wrong one. There’s also the chance you pick a winner, however the odds are low. Research shows even the professionals have difficulty beating the market.
Managed funds
Managed funds pool investors funds and allows you to have exposure to a number of different companies without needing to invest in individual shares or pay for multiple transactions. Managed funds that are actively managed usually aim to outperform a benchmark such as the ASX200 or S&P500. Whilst they vary, there’s normally a minimum investment amount of around $10,000.
The benefit of managed funds (and exchange traded funds) is that they are inherently diversified to some degree. You also receive distributions which are your share of the dividends paid less any fees.
Exchange Traded Funds (ETFs)
Exchange traded funds are similar to managed funds however are listed and traded on a stock exchange, for example the Australian stock exchange. ETFs usually track indexes and there are a plethora of ETFs that are passive. This means they replicate an index rather than being actively managed where the investment managers actively try to outperform the benchmark or index with varying degrees of success. Because they are passively managed the fees are generally lower.
You also receive distributions which are your share of the dividends paid less any fees.
So which option is best?
Well it depends, some things to consider are how much involvement you’d like to have in your investments, how comfortable you are choosing direct shares or ETFs and how much money you’d like to invest to start with.
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