Buying Individual Stocks vs. Mutual Funds

Buying Individual Stocks vs. Mutual Funds

The program shows a young couple deciding how to invest  for their future.  They compare using a full service broker, a mutual fund, or a discount broker.  The point here is not to identify which method is best.  It is to teach that investment decisions should be made with careful thought and research.  There is no single correct answer.

Why do share prices go up or down?  The number of shares is limited. So if a stock has more buyers than sellers, its price is bid up. But if the opposite is true – big supply and very little demand – the price drops. It’s a classic example of the law of supply and demand.

When you buy a stock, you buy an opinion about the future of the company.

Here’s that idea again — the price of a stock reflects the opinion of investors.  Whether their opinion is correct or wrong has no bearing on the current price of the stock.

Picking stocks is a bit like a beauty contest in which you win if you can determine which contestant the judges will crown as the winner. It doesn’t matter who you think is most beautiful. What counts is if you can “read the judges mind.” That’s how you win with stocks. By picking stocks lots of people will want to buy in the future.

Economist John Maynard Keyes was particularly fond of this metaphor.  The long running TV game show, “Family Feud” is another example of this win-by-picking-what-others-will-select situation.

The second way shareholders earn money is through dividends.  For example, your $10 stock pays a twenty cent dividend four times a year, each year you own it.  A dividend is a share of the profits paid to current shareholders.

Some companies pay regular dividends year after year.  These stocks are best for investors who need regular income...  But other companies rarely pay dividends.  Companies like Microsoft, Intel, Amazon plow profits entirely into expanding the business; and that can be good for investors as well.  Companies are not required to pay dividends. Stocks are not short term investments, but they do quite well over the long term. Since 1925 stocks have gained on average 9% a year.

If you could have invested $15 a week in a typical basket of stocks at almost any time in the past century starting at age 15, you would be a millionaire by age 55. This assumes a 9% return.