Stock picking is a skill honed through trial and error. A strategy that is profitable under one circumstance won't necessarily be profitable in another, which means the overall success of your investments depends upon your skill as s stock picker. Conversely, when you invest in funds -- such as exchange-traded funds or mutual funds -- you pay a fee in order to benefit from a fund manager's expertise. The decision between picking stocks and paying for a manager's expertise is predicated upon how your abilities compare to those of the fund manager.
The goal of picking stocks is to create a profit no matter which direction the market moves -- even if it does not move at all. Picking stocks gives you the freedom to take a long position or a short position in a stock, or to try trading schemes such as pair trading. Taking a long position in a stock means you buy it, or buy its options, in anticipation of its price rising; a short position is the opposite. Picking your own stocks is riskier than investing in funds because, due to the amount of capital invested in a fund, the manager may be able to better hedge investments against risk.
Exchange-Traded Funds and Mutual Funds
Fund managers pool money together from individual investors and then invest them in diverse securities. Funds have the distinct advantage of creating a diversified portfolio for an investor while having a professional manager monitor the investments. Price movements in mutual funds are also easier to predict than those of easier stocks, according to Austin Pryor of Crown Financial Ministries. One downside to mutual funds is the requirement to pay fees and commissions to the fund manager, even if the fund does not yield a positive return, according to the Securities and Exchange Commission.
An exchange-traded fund, or ETF, is a security that tracks an index, commodity or industry, but is traded on a market just like stock. ETFs have grown in complexity and in their degree of financial risk since their inception in 1993. Penelope Wang of CNN Money recommends that small investors stick with pure, traditional ETFs because they provide enough portfolio diversity without exposing investors to unexpected risks. Because ETFs are traded like stock, investors can buy and sell them like stocks, according to the Accumulating Money website, which means trading them is easy. Such ease could lead to impulsive or irresponsible trading.
Making the Call
Funds provide investors with a diversified portfolio at a cost that is usually lower than buying stock. Although both ETFs and mutual funds are professionally managed, ETFs trade like stock. Deciding to invest in traditional mutual funds, ETFs or to pick individual stock on your own largely depends upon your goals and abilities as an investor. Funds tend to be less volatile than picking stocks. Invest in securities that work toward your goals and that do so by taking financial risks with which you are comfortable.
- Stock Market Today: "Stock Picking Strategies | Learn the Stock Market"
- Crown Financial Ministries: "Twenty Major Advantages of Investing in Mutual Funds"; Austin Pryor, 2008
- Securities and Exchange Commission: "Invest Wisely: Mutual Funds"; July 2, 2008
- CNN Money: "ETF Investing Done Right"; Penelope Wang, June 18, 2009
- Accumulating Money: ETF Investing
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