Stock Market Investing: 3 Ways of Investing

So you have decided that you want to invest, specifically in the stock market. Great choice.

Now the question that you may be asking yourself is: how should I invest in the stock market?

At first, it may seem quite overwhelming with all the platforms, apps, and choices out there.

I shall attempt to help you out a bit! There are essentially 3 ways to invest in the stock market:

The first way to invest in the stock market is by picking individual company stocks/shares.

The second way to invest in the stock market is by investing in an actively managed fund.

The third way to invest in the stock market is by investing in what is known as index funds.

In this post, I talk about the 3 ways of investing: stock picking, active funds, and index funds.

I also talk about the differences between them in terms of their fees and their performance.

Finally, I will talk about my personal preference as well as where to go for further information.

1.    Stock Picking

Stock picking is where you decide to choose individual company stocks & shares to invest in.

This particular type of investing is what you might find on platforms like etoro, freetrade, etc.

For example, you might decide that you want to invest in Amazon, Google, Apple, Tesla, etc.

Therefore you would go on these platforms and purchase some shares in these companies.

The reason why you may choose to invest this way is because you believe in these companies.

Apple, Google, Amazon aren’t going anywhere any time soon – makes sense to invest in them.

You may find shares that are undervalued so you invest in the hope that their value goes up.

However, the disadvantages to this way of investing is that there is very little diversification.

You’re betting on just a handful of companies – if any of them fail, then your investments fail.

You would want to read up on these companies to understand what you are investing in.

2.    Actively Managed Funds

An actively managed fund is where you decide to pay someone to invest your money for you.

In other words, you pay a hedge fund to choose the individual stock and shares to invest in.

The reason you may want to invest this way is because you are not comfortable stock picking.

Businesses that provide this kind of service are St Jame’s Place and Wealthify to name a few.

So rather than deciding what to invest in yourself, you pay a wealth advisor to invest for you.

You decide what your goals are and how much you have to invest, and they invest accordingly.

The disadvantages to this kind of investing is that these hedge funds tend to charge high fees.

Although 1% in fees may not seem high, it slowly compounds and attacks your investments.

As well as that, 96% of hedge funds fail to outperform the market; only 4% of them do better.

Not only that, but the 4% of hedge funds that do outperform the market changes every year!

3.    Index Funds

An index fund is the third type of stock market investing where you own the entire market.

Rather than choosing which companies to invest in or paying someone to choose for you, you invest in an index fund that contains a large number of companies across multiple industries.

For example, the Vanguard FTSE Developed World Index fund is an index fund made up of 2,127 stocks from global companies all around the world and across all sorts of sectors.

The benefit to this type of investing is low fees – you are not paying anyone to invest for you.

The other advantage is that the performance is so much better when you are this diversified.

The disadvantage to this is that index fund investing is not accessible to everyone worldwide.

Also, there are many different types of index funds – it can be hard to choose the best one.

Which is Better?

In theory, each of these three stock market investing strategies sound like potential options.

As with any investment opportunity, they each have their advantages and advantages.

However, at the end of the day, we want to choose the option that will give us the best return.

So if I invested £10,000 how much would it be worth after 10 years with these strategies?

The Rebel Finance School give a great example of this – shown in the image above:

If you invested in an active fund with an expensive advisor, your £10,000 investment would be worth £9,534 and you’d have paid £2,558 in fees – you’d have lost money after 10 years.

If you invested in a low cost platform with the same active fund, your £10,000 investment would be worth £10,280 and you’d have paid £1,859 in fees – not great returns after 10 years.

If you invested in a low cost platform and an index fund, your £10,000 investment would be worth £34,730 and you’d have paid £391 in fees – that’s more than 3x growth after 10 years!

How will you Invest?

As you can see from the results above, there really is no comparison in terms of performance.

Index funds triumph actively managed funds and stock picking every time in the long run.

As well as that, they are the most passive form of investing – they require very little work.

This is personally how I invest in the stock market – by investing in an index fund. The platform I use is Vanguard, the account I use is an ISA, and the fund I use is the FTSE Developed World.

If you want to find out more on index fund investing, check out the Simple Path to Wealth.

It’s a great book all about Index Fund investing, and the steps you can take for yourself.

Do you invest in the stock market? What’s your way of investing? Leave a comment below!

If you enjoyed this post, check out a similar post on how to retire early by tracking your savings.

If you have any suggestions for future blog post topics, please share in the comments below!