Question

George, their family friend has informed the couple(Jacinda and Steven) during a family dinner that “although in Australia the individuals invest directly in the stock market, in recent years 31% of the adult population directly invest by holding shares, down from 44% in 2004”. Their question to you is:

If direct share market participation is a good or bad strategy for an investor? Discuss one reason why investors should or should not invest directly in the Australian shares.

Answer 1

Direct investment can be made in the Australian shares if the person investing has a good knowledge about how the financial and stock markets function. Direct investing into shares should be done only by doing a proper research of the stocks, with predefined investment horizons and target returns. Also, the investor must have a fair bit of risk taking appetite to invest directly in the stocks.

On the other hand, a person who wants to invest in shares but not directly, can invest in instruments like mutual funds. Mutual funds are managed by finance and investment professionals who in turn invest the money into stocks based on their expert judgement and experience. Mutual funds don't gurarantee superior reutrns always, but historically, across the world, good mutual funds have often beaten the market returns. Mutual fund units can be bought and sold just like units of shares of any listed company.

Investments in mutual funds entail some additional costs like entry and exit load, whereas such costs are not present if the investment is made directly into the shares. However, investment through mutual fund can provide additional benefits like effective diversification of risk and can save up investor's time of having to manage and monitor the investments.