Buy shares or invest in a fund

We compare the characteristics of both assets.
There are several methods available to investors to get a return on their money. There are savings and investment products for all types of profiles, meaning the choice isn't always a simple one. One of the main issues comes when deciding whether to buy shares personally (known as a direct investment) or invest in an investment fund. If that's your case, we'll explain the differences between the two forms of investment below so that you can choose the one that best suits your needs.
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Direct and indirect investment

The main difference between purchasing shares and investing in a fund is that the former involves direct investment, while in the latter, the investment decisions are left to a management company. In the first case, the investor can purchase the stocks that interest them directly and decide when to sell them, though they can also rely on a financial adviser or entity to help them manage their stock portfolio. Investment funds work differently. In this case, a private individual pays into the collective assets of the fund, which is managed by a team of professionals. The investor can decide when they want to subscribe (buy) or redeem (sell) their shares, but they can't make any decisions regarding the fund's investment policy.

These characteristics make the purchase of shares an individual transaction in which the investor can make their own decisions and take direct action, or rely on the services of a portfolio manager. In contrast, funds are a collective investment instrument that are backed by the management and depository companies, with the management team making the investment decisions based on the fund's investment policy.

The freedom to invest

From the above, it follows that buying shares offers more freedom to investors. They can determine how much and when to invest, in what companies, etc. This is therefore a good option for investors with clear goals who know the market and are interested in taking advantage of a specific opportunity.

People who invest in funds don't have this freedom. If they disagree with the management company's investment policy, all they can do is sell their shares or transfer them to another fund, but they can't influence investment decisions in any way.

Financial knowledge and analysis

Although the freedom when investing may provide an incentive, it does also pose a challenge to inexperienced investors. If you want to make money by buying and selling stocks, you should have at least some knowledge of financing and of how the markets work. The absence of an investment strategy can result in significant losses for an investor, given the high volatility of equities markets. In addition, managing an investment portfolio requires time: you have to stay up to date with price trends, the correlation between companies, the results of different markets and many other factors that are essential to getting a good yield.

In this regard, investment funds offer a significant advantage since they don't require any prior knowledge. This investment product is managed by a group of experts, meaning the investor doesn't need to stay abreast of developments in the securities markets. As for financial knowledge, you only need to understand the characteristics of the different funds and know their net asset value, a figure that is published daily and that reflects the value of the shares. The way a fund works is quite simple and the only thing the investor needs to do is to track it from time to time.

Level of risk and returns

Buying shares is very risky for inexperienced investors. Although the professional agents who manage the investment fund can't guarantee there won't be losses, they do have the knowledge and experience needed to minimize the risks. Moreover, some funds guarantee the initial investment at the conclusion of the specified period.

The risk goes hand in hand with another key factor: returns. Higher returns usually entail more risk, so funds are often a safer option, though their potential benefits are lower. However, the purchase of shares doesn't automatically translate into higher returns if it's not paired with an appropriate investment strategy or if market conditions are not favorable. In any case, there are funds that invest all their assets in stocks, so those with an aggressive profile who are seeking high returns may find these types of products a good option.

A major advantage of investment funds is diversification, which is one of the keys to reducing risk. An equity fund can have 40 or 50 stocks. Achieving this level of diversification through direct investment would entail significant costs and large volumes. Investment funds offer the benefits of great diversification at a low price without having to invest a large amount.

Cost and taxation

The costs and tax characteristics of each product can also have a significant effect on the final returns. The cost of trading shares will depend on the market where they are listed, but fees will be charged on each transaction, whether to buy or sell. Investment funds have an annual management fee and a deposit fee (already deducted from the net asset value that is published daily).

With regard to taxation, investment funds offer greater tax advantages, since even though both are taxed as capital gains, in the case of investment funds, transfers between them don't have any type of tax implications. They are only taxed after they are sold.

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Streamlined management

Trading shares is easier, since they are traded in real time. Investment funds take a while to settle (2-3 days) and the investor doesn't know what the net asset value will be when they place the order. There is a type of fund, called exchange-traded funds, or ETF, that is a hybrid between shares and funds and is listed in real-time. They mirror indices (stock exchange, fixed income, currencies, etc.).

In short, the decision to buy shares or invest in a fund depends on the investor's profile. Both options have pros and cons that investors have to evaluate before deciding on one investment type over another. At BBVA, we offer all types of savings and investment products, including our own investment funds and securities accounts. Visit bbva.es or any BBVA branch for more information on how to put your savings to work right away.

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