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Share Investment Alternatives

Mutual Funds

The best alternative method of investing other than DRIPs is mutual funds. The investor can have a diversified portfolio while investing in mutual funds which requires less effort and involvement. As opposed to trading of shares there are less fees and commissions involved in mutual funds.

While investing in mutual funds, money is pooled from many investors and more over a higher level of diversification is achieved. The investor can also benefit from:

  1. Small capital amounts can be invested

  2. Diversification thus leading to lower risk as when compared with speculative purchasing of shares

  3. Less brokerage fees and commissions when compared to traditional buying and selling.

Exchange Traded Funds

An exchanged traded fund is traded just like stocks in stock exchanges. ETFs hold assets like stocks, commodities or bonds at Net Asset Value (NAV). The funds combine valuation of features of mutual fund or unit investment trusts bought or sold at end of each trading day for its net asset value (NAV). Investors are offered an undivided interest in a pool of securities and other assets, similar to mutual funds, and can be traded like shares throughout the day. ETFs provide easy diversification. Some of the advantages of ETFs are:

  1. Lower marketing, distribution and accounting expenses.

  2. Buying and selling of ETFs at any time during the trading day, unlike mutual funds and unit investment trusts. The funds can be purchased on margin and sold short.

  3. Tax efficiency is achieved with relatively low capital gains as the turnover of such portfolio securities is low

  4. Transparency of funds is managed with transparent portfolios and priced at frequent intervals throughout the trading day.

  5. Low management costs.
Types of ETFs
  • Index ETFs

  • Commodity ETFs or ETCs

  • Bond ETFs

  • Currency ETFs and ETCs

  • Actively Managed ETFs

  • Leveraged ETFs

  • Exchange-traded grantor trusts

ETFs vs. Mutual Funds

ETFs are traded in a stock exchange just like shares; thereby this is subject to brokerage commission. Generally, mutual funds obtained from the fund company itself do not charge a brokerage fee. ETFs have lower expense ratio and management costs when compared with mutual funds, mutual funds can charge commissions of one to three percent or more, index fund ratios while ETFs are almost 0.1 to 1 percent range.

ETFs are tax efficient when compared to mutual funds. Whenever a mutual fund realizes capital gain, these gains are taxable to shareholders even when the gains are reinvested. The most important benefit of an ETF is its share like features. Like shares, the investors can sell short, buy on margin, stop-loss order and invest as much as or little money as they wish.

Buy Low and Sell High

The most conventional style of investing is speculative trading. This kind of investment involves high levels of stress and a highly reliable middleman (broker). The biggest problem is the market, it can either be bullish or bearish which adds the risk or benefit to the shareholders to either lose or gain money. Every investor relies on the consensus of the market the ups and downs directly affect them. The market price of the stock, earnings potential and market conditions can either make or break a successful investor.

Disadvantages:

The speculative trading involves brokerage fees which though is a small cost it can reduce the profit. Above all, the competition among the peer companies is a challenge to the speculative trader.

Buy and Hold

Another historical method of investing is when buying the stock when the price is less and holding for the long term until the prices goes up in the market. The investor effectively disregards short term price movements in post purchase. Investors can benefit from dividend payments through this strategy, for an individual investor, this method of investing can be vastly improved by investing in DRIPs.

Rather than taking dividend payments it’s beneficial to partake in DRIPs and build on the investment ladder for the long term using this strategy.