When bitcoin mania began in 2017, and then again later in 2020, semiconductor companies, blockchain companies, and crypto miners became very attractive to traders,” said Aziz. “There are many reasons why a sector will suddenly experience volatility. “Every quarter, during the few weeks when most companies are reporting their earnings, you can usually pinpoint a plethora of individual stocks in play that are offering excellent trading possibilities,” he said.Īnd in waiting for broader industrial trends to take hold, Aziz argues, the investor may be left waiting for the right timing. The benefits of stocks, Mould argues, stem from the fact that, when closely monitored, they can perhaps be easier to predict and react to than large, varied indices. “And ultimately an index will not go up all of the time – a tracker or ETF will do a good job of following an index up, but it will follow it down just as efficiently.” “Trackers can tempt investors to reach beyond their normal risk parameters by enabling them to buy something that would have perhaps been beyond their reach otherwise, such as emerging or frontier markets, or a specific theme or industry,” Mould added. If managed poorly, the difference between stocks and indices can count for little to the investor’s balance sheet. The diversity on offer could also lead to complacency, particularly given the rise of tracker indices, including exchange-traded funds (ETFs), which follow the market. “These can work well but they can also go wrong and leave the investor owing something which is riskier than it looked.” “The number of indices has proliferated over the past few years and many offer exposure to very narrow themes,” he said. Even if your scanner identifies what at first glance might appear to be a strong stock in play, there may very well still be more opportunities to be had in trading index funds.” Easier to predict and reactīut Mould cautioned against backing indices without giving consideration to wider factors, particularly as the number of indices on offer grows. “The majority of the market moves together and it is thus harder to find stocks in play. “Some indices are very exposed to just a select number of stocks or industries and if they go wrong, the investor may find themselves unwittingly exposed here, unless they carry out careful study first,” he said.Īndrew Aziz, founder and CEO of Peak Capital, can see why index trading became the optimal investment strategy during the height of Covid-19. Mould pointed out that indices allow both a reduction in the administrative headache of individual dealing and trading costs, as well as a contextual buffer of reducing exposure to risk in a given industry, sector or geography. This saves time,” said Russ Mould, investment director at AJ Bell. “Given the time involved and expertise required, you can understand why many investors would rather save themselves the trouble and put their money into a tracker or an exchange-traded fund. Market moves togetherĭeciding whether to lump a majority of funds into individual stocks or index funds is also a technical question about how an investor prefers to manage risk, and the time they have available to do so. For traders, stocks provide higher volatility, yet require a closer eye on the company, and on the industry and economy in which it operates.Ī number of analysts and traders spoke to about the fortunes of stocks and indices this year, and what investors should contemplate as they decide to buy a stock or index fund. In times of economic expansion, as has been seen globally in the aftermath of the Covid-19 pandemic, indices can offer an easier path to realising broad market gains.Ī big theme in the stock versus index debate is risk and return. The key difference between stocks and indices is that for the latter, shocks are smoothed, resulting in lower volatility. The main benefit is the reduced risk that comes with banking on a collection of several companies, typically indexed on the basis of size. This year, much like the past two, is filled with new uncertainty and a dynamic global economic backdrop that warrants an assessment of risk profiles, and one that will often come down to a key question: Is it better to buy indices or specific stocks?Īn index fund is designed to track the performance of a particular market index, such as the S&P 500 or the FTSE 100. The beginning of a year is often the time when traders and investors reassess their strategies, reflecting on the gains they have made in 2021 and contemplating how the world – and stock markets – have changed. Stocks vs Index trading: What’s the difference? – Photo: Shutterstock
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