Learning about the difference between stocks, managed funds, and ETFs, is a good idea, because:
- They’re three easily accessible ways you can invest in equities.
- Understanding your options can help you know what suits you best.
- They can each play a different role in your long-term investment portfolio.
It’s broadly agreed that if you want to grow your wealth, investing your money can help you reach your goal.
Three common ways people invest their money are through stocks, ETFs, and managed funds.
Here’s what they are, and why they might be right for you.
What is a stock?
A stock, also called a share, is a piece of a company you can buy, hold, and sell.
Shares aren’t physical, so the proof of ownership you receive is generally a certificate.
When a company wants to raise money, it can sell parts of itself to the general public. These parts are called shares. The shares are generally listed for sale on stock exchanges, where members of the public, called retail investors, as well as professional investment funds, called institutional investors, can buy and sell them.
When you buy shares, you generally decide to buy a set amount, or spend a specific amount. For example, you could buy 1000 shares in a stock, or buy $1,000 worth of a stock.
The price of a stock can change hundreds of times during a day, depending on how many people place orders to buy and sell it.
Should you buy stocks?
People generally buy stocks because they think they’ll be able to resell them at a higher price, and profit from the difference. They’ll usually choose companies that they think represent good long-term buys, or because they’re guessing that there’ll be a short-term movement they’ll be able to take advantage of.
Remember, in investing, when we say short-term we mean up to three years, and when we say long-term we mean at least seven years.
There’s another type of investors called daytraders, who’ll buy and sell lots of stocks during the day. It’s important to remember that not all investors have the same timelines or reasons for investing, which is why having your own plan is so important.
What should you keep in mind if you’re buying stocks?
- Depending on where you buy and sell your stocks, you may pay a brokerage fee, which is a cost per trade paid to the person or company that facilitates the trade.
- You’re not guaranteed to make money because your stock could be worth less than you got it for when you need to sell it.
- You’ll need to do your own research, and remember that there are no guarantees when investing.
- If you’re building a diversified portfolio, which is broadly recommended, then just buying one or two different stocks probably won’t give you enough diversification.
- The price of a stock will rise and fall depending on factors like company news, industry news, and broader market sentiment.
What is an ETF?
An ETF is an investment fund that’s typically made up of lots of different stocks. ETF means exchange traded fund, which means the fund is traded on stock exchanges just like stocks are.
ETFs follow rules, or themes. These rules include conditions such as “only invest in stocks that produce dividends” or “only invest in Blue Chip stocks”.
ETFs can be actively or passively managed.
Passive ETFs generally aim to deliver the same performance as an index, for example, there’s an ETF that tracks the top 200 companies on the ASX, and investors who buy into it should see similar returns as the ASX minus fees.
Active ETFs have a team that researches, then picks the companies, and decides how much of each to keep in the portfolio. They aim to outperform the market, but also charge more money to do so.
Because ETFs are traded on stock exchanges, their prices also update multiple times per day when units in them are bought and sold.
Should you buy ETFs?
ETFs contain exposure to hundreds of companies, which means that you get much more diversification in a single transaction than you would just by buying individual stocks.
It’s important to remember, though, that ETFs themselves may not give you enough diversification – for example, if you only hold the ASX200 fund, you only get exposure to the Australian market, which means that you may miss out on opportunities in other geographies such as the United States or Europe.
You can buy ETFs on stock exchanges like you would individual stocks.
People tend to invest in ETFs because they want to hold onto them for the mid- to long-term.
What should you keep in mind when buying ETFs?
- Before buying an ETF, you’ll need to make sure you understand how much it costs, what part of the market it aims to replicate, how you can buy or sell your units in it, and the risks that are involved.
- If you’re planning on investing long-term into a particular ETF, you could consider setting up an investment plan, and taking advantage of dollar-cost averaging. This is when you make regular investments in the fund, which can keep your average purchase price lower than if you’d bought in a lump sum at a high, which can happen.
What is a managed fund?
A managed fund is a handpicked group of stocks based on a fund manager’s discretion. For example, at Spaceship our Spaceship Universe and Spaceship Earth portfolios are managed funds made up of companies that we think meet our Where the World is Going criteria, and in the case of Spaceship Earth, also do good things for people and the planet.
Actively managed fund managers aim to outperform the general stockmarket over time. They’ll actively research and assess stocks before deciding which ones make the cut, which ones go on the watch list, and which ones aren’t suitable.
The price of a managed fund is updated once per day.
Should you invest in a managed fund?
When you buy into a managed fund, you get issued what’s called a unit. A unit represents exposure to each of the companies the fund has invested in. For example, if your managed fund has invested in 50 companies, your single unit will represent tiny pieces of all 50 companies.
People invest in actively managed funds because they believe in the fund manager’s ability to outperform the market over time. Managed funds usually have a fee structure that reflects this.
Managed funds aren’t listed on stock exchanges, and traditional managed funds can be harder to buy. That’s part of the reason Spaceship Voyager was founded – to make investing in managed funds as easy as downloading an app.
People tend to buy managed funds for medium to long-term.
What should you keep in mind when buying managed funds?
- It’s really important to understand what you’re investing in, particularly when it comes to managed funds, because you’re trusting someone else to manage your money.
- Fund Managers are required to give you a Product Disclosure Statement (PDS) for each Fund they offer. A PDS summarises the key information about a product which includes information about the product issuer, any fees, benefits and risks associated with the product, dispute resolution, cooling off periods, and the recommended time frame for investing.
- Typically, a managed fund is a medium to long-term investment, so you should be thinking about whether you can hold your investment for the suggested minimum investment time frame outlined in the Fund’s PDS. The Spaceship Voyager portfolios, for example, have a recommended minimum holding period of 7 years, because of the long-term rationale behind it.
Make sure you know what you’re investing in
Once you identify the best investment type for you, the next step is to figure out how it fits into your portfolio.
You’ll need to pay attention to how each investment fits in with your risk appetite, investment timeframe, and diversification needs.
There’ll also may be different fees, including brokerage fees, which are the price of buying and selling investments; management fees, which is the cost of having others manage your money for you; and a bid/ask spread, which is the difference that can arise between the price you want to sell an investment for, and the price someone else is willing to pay for it.
Where can you learn more?
Keep learning about investing at Spaceship Learn or MoneySmart, because the more you know, the better choices you can make.
