You can buy stocks outright if you have a brokerage account. But the bigger question is whether you should buy stocks outright. It all depends on how much time you can devote to stock picking, the amount you have to invest and your tolerance for risk. Your age is also important, because older folks have less time to recover from serious losses.
The Case for Stocks
Investor Warren Buffet says you should expect an average annual return of between 6 and 7 percent on stocks. As long as stock returns outpace the inflation rate, your investments can experience real growth. If you have the time and inclination to pick stocks, you might be able to score double-digit returns in some years. Stocks are cost efficient if you hold them for long periods, because you only pay fees when you buy and sell them. You don’t have to pay management fees and if you hold the stock for more than a year, you’ll pay lower, long-term capital gains taxes when you sell. Another benefit of stocks is that you can buy high-dividend stocks to earn current income.
Stocks are risky. During the 17-month bear market beginning on Oct. 9, 2007, stocks fell 55 percent. Stocks have since recovered, but if you sold your stocks after a substantial loss and don't re-enter the market, you lock in irrecoverable losses, especially if you’re an older investor. If you’re on a fixed income, you might not want to take the risks of outright stock ownership, because you might be unable to reinvest after sustaining losses. If you actively trade stocks, you might pay a significant amount in commissions over the course of a year.
The Fund Alternative
You can lower your stock investing risks by purchasing stock-based mutual funds and exchange-traded funds, or ETFs. Your investment buys you a slice of a diversified portfolio, which reduces the amount you’ll lose because of an occasional bad stock pick. You can pick an actively managed fund and try to beat the market benchmarks. If you instead choose an index fund, you’ll earn the benchmark return and pay lower management fees. Owning an index fund might allow you to stay committed to your investment because you know that you won’t underperform the market. You can invest in funds that specialize in high-dividend stocks to supplement your current income. On the downside, you’ll pay management fees and give up control of your stock choices.
Another way to gain exposure to stocks while reducing risk is through convertible bonds and convertible bond funds. Because you can convert these bonds into stock shares, you can benefit from a bull market in stocks. During the 17-month 2007-2009 bear market, convertible bonds lost 43 percent, making their performance 12 percentage points better than that of stocks. Convertible bonds pay interest that cushions your losses and provides current income. You can hold convertible bonds conveniently through mutual funds and ETFs. Convertible bond performance is hurt by rising interest rates and a declining stock market.
- Photodisc/Photodisc/Getty Images