How Do Individual Investors Buy Stocks?
There are many ways for individual investors to buy stocks, each with advantages and disadvantages. If you want low fees, you might have to put more time managing your investments. If you wish to outperform the market, you may pay higher fees. If you want a lot of advice, you'll probably have to pay more as well. If you don't have much time or interest, you might have to settle for lower results.
Perhaps the most risk is from the emotional aspect of investing. Most stock buyers get greedy when the market is doing well. Unfortunately, this makes them buy stocks when they are the most expensive. A poorly performing market triggers fear. That makes most investors sell when the prices are low.
Selecting which way to invest is a personal decision. It mostly depends on your comfort with risk. It also depends on your ability (and willingness) to spend time learning about the stock market.
Buy Stocks Online
Buying stocks online costs the least, but gives little advice. You are only charged a flat fee, or a percent of your purchase, for each transaction. It can be the riskiest. You obviously get little or no advice. It requires you to educate yourself thoroughly on how to invest. For this reason, it also takes the most time. It's a good idea to review the top online trading sites before you get started.
Joining an investment club gives you more information at a reasonable cost. But it takes a lot of time to meet with the other club members. They all have various levels of expertise. You may be required to pool some of your funds into a club account before investing. Again, it's a good idea to research the better investing clubs before you get started.
A full-service broker is expensive because you'll pay higher fees. However, you get more information and recommendations. That protects you from greed and fear. You must shop around to select a good financial professional that you can trust. The Securities and Exchange Commission offers helpful tips on how to select a broker.
Money managers select and buy the stocks for you. You pay them a hefty fee, usually 1-2 percent of your total portfolio. If the manager does well, it takes the least amount of time. That's because you can just meet with them once or twice a year. Make sure you know how to select a good financial advisor.
Also known as exchange-traded funds, index funds can be an inexpensive and safe way to profit from stocks. They simply track the stocks in an index. Examples include the Dow Jones Industrial Average or the MSCI emerging market index. The fund rises and falls along with the index. There is no annual fee. But it's impossible to outperform the market this way because index funds only track the market. Even so, there are a lot of good reasons why you should invest in an index fund.
Mutual funds are a relatively safer way to profit from stocks. The fund manager will buy a group of stocks for you. You don't own the stock, but a share of the fund. Most funds have an annual fee, between 0.5 percent to 3 percent. They promise to outperform the S&P 500, or other comparable index funds. For more, see 16 Best Tips on Mutual Fund Basics and Before You Buy a Mutual Fund.
Hedge funds are like mutual funds. They both pool all their investors' dollars into one actively managed fund. However, hedge funds invest in complicated financial instruments known as derivatives. They promise to outperform the mutual funds with these highly-leveraged investments.
Hedge funds are privately-held companies, not public corporations. That means they aren't regulated by the SEC. They are very risky, but many investors believe this higher risk leads to a higher return.