Question

1. What are the advantages and disadvantages of investing with an investment company rather than buying securities directly?

Answer 1

1. The advantages and disadvantages of investing with an investment company rather than buying stocks directly is :

• When an investor buys stocks with an investment company, we get benefit of their expertise and knowledge on the market and the kind of stocks we should invest our hard earned money on. Investment management companies professionally manage our funds.
• The investment management companies deal in stocks on a large scale so they can provide the benefit of diversification, liquidity and economies of scale to it's investors. Diversification reduces the risk for an investor by holding a diversified portfolio. Funds can be easily converted to cash as they are less volatile in nature.
• Investment companies take advantage of the buying and selling volume to reduce the transaction costs for the investors.

The disadvantages of investing in an investment company is :

• The fees and various expenses charged by these companies in return for effectively managing our funds which are entrusted to them. Due to the higher expenses paid in getting the funds professionally manged the net return on these funds is low.