Mutual funds versus individual securities

For a majority of people, mutual funds should beyear—See Unit 9.) Third, owning
a major part of their investment portfolio--unlessindividual stocks means you are less likely to have
they have a lot of money and ample time toproper diversification. To diversify a stock
devote to investing in individual securities. Whileportfolio, you need to own at least 10 to 20
there are arguments for buying stocks and bondsdifferent companies in different industries, which
directly, consider buying mutual funds first, or atcould cost thousands of dollars. For the same
least use them as a core holding, because of theprice you might pay for 100 shares of one
following drawbacks to individual stock and bondsecurity, you can buy shares in a fund that owns
picking and trading: First, a great deal of time and100 securities. Diversification lowers your
expertise is required to analyze ainvestment risk—if one or two stocks
company—its prospects for earningsplunge, others may gain in value, offsetting the
growth, its performance over the short and longloss.
term in comparsion to its competitors, its debtNevertheless, there are several circumstances
level and creditworthiness, its new products in thewhen you do not need mutual funds: If you are
pipeline, and technological changes looming thatadept at picking individual stocks If you have at
might harm or improve business.least $20,000-50,000 to buy at least 10 to 20
Second, purchasing individual securities involvesstocks (depending on stock prices) You plan to
higher transaction costs. Even when you use ainvest in Treasury bills or notes.
discount broker, the commissions you pay to buyIn the last case, you would do better purchasing
and sell are not cheap. (However, the cost ofthem directly through the Federal Reserve's
online trading is getting lower everyTreasury Direct program.