The Differences And Similarities Between Stocks And Unit Trusts

I have a few clients who are interested to know the differences and similarities between investing in stocks and investing in unit trusts. And for the benefits of letting more understand this two investment vehicles, this is a post dedicated to this topic.

And I will try to put it down as general and as simple as possible for your understanding.

Investing In Stocks And Unit Trusts To Grow Your Savings

Stocks and Unit Trusts are just a few of the investment tools that people will use to grow their savings (on top of the usual saving in a normal bank savings account and fixed deposit securities).

The other investment tools could be investing in properties, art pieces, liquid assets (e.g. wine), or even in forex.

And if you are into investing, you will know that most of your investments come with risk. And with potential high risk comes with higher potential returns. The reverse also applies. Lower risk comes with lower potential returns. In investment, it’s good to know that most of the time, what you have invested has no guarantees, i.e. there’s a possibility that you can lose your initial capital.

But if you educate yourself well and you do know

  • what you are investing,
  • your risk appetite, tolerance,
  • how long you wish to stay invested
  • the nature of the investment,
  • the risk nature
  • the capabilities of the management

Most of the time… the risk is well-contained!

And that you have generally known the nature of investment, it’s back to the initial topic.

What Is A Stock/Share?

To put it simply, a stock or share is part of an individual company and to help you familiarize the world of stocks, you can have a look at our Singapore Stock Exchange website, and you can basically see a long list of stocks available.

And every stock has its price tag. It can be as low as $0.01 to the range of $10 and above per share. The initial price depends on the value of the company when its listed.

In Singapore context, you have to subscribe to a minimum of 1000 shares. So if a share is $1, a 1000 shares is $1000. And to get involved in buying and selling, you can choose to go through a securities or brokerage firm which will set up a CDP account with you and also give you access to an online trading platform.

If you like some personal services, you can even engage a broker or remisier to be attached to your account.

The Benefits Of Owning Stocks/Shares

1. By owning shares, you are part of the company who has listed it, so you get to have voting rights in their Annual General Meeting (AGM) in which some important company decisions are to be decided. And you get to voice out what you think or how you want to go about it.

2. You get dividends and issue rights. Dividends are the profit sharing scheme of the company if they made profits in that year and they decide to share with the company. But you do need to know that not all companies give dividends even if they are in profits.

Issue rights are also a scheme where you get to own extra shares (usually at a discount price). These extra shares are usually not offered to the public. So if you like the company, its management and its direction, you may wish to take advantage of this.

3. Capital Appreciation. If a company has been doing well over the years, and they are functioning well in a business sense, the stock price will usually rise. So if you get in at a certain price and the new price is higher, you have just enjoyed capital appreciation. And to lock in this profit, you may choose to sell off the shares.

The Disadvantages Of Owning Stocks/Shares

1. Nothing is guaranteed. A stock price can be high today and fell very low the next day. And this low can remain very long till the stage that your money is just sitting there. No interest is earned. If you decide to have the money back and to sell it low, you will suffer a loss!

2. You need to understand the industry and company. You cannot invest blindly as certain industries have its ups and downs. So you will need to understand the company that you are investing in, its future prospects and how in general the economy affects the shares performance.

3. You need to keep track. As mentioned in Point #1. You need to know the movement of the shares that you are in. But not to the extreme that you have to do so everyday. If you are into the shares on a long term basis and you know that the company is financially strong and sound, you can do so on an occasional basis.

To invest in your own education on stocks, you can check out this online book store >> Books on Shares

What Are Unit Trusts?

To put it simply as well, I would say that Unit Trusts are a collection of different (and usually related) shares.

For example, I am currently investing in a Singapore Equity Fund. And this is known as a Unit Trust. And within the Singapore Equity Fund, my investment is made up of different company shares, e.g. the local bank shares, telecommunication company and some other companies.

And these Unit Trusts are usually managed by a Fund Manager who belong to a Fund Management Company (or known as Fund House). And there are many different Fund Management Companies in Singapore with their own expertise and knowledge.

To help you get a better feel of what are the Unit Trusts and Fund Houses available, you can check out this site >>

Similar to a stock, there’s also a price tag. For newly launched funds, it usually starts from $1. And for you to start investing, you usually need to put in a minimum of $1,000 or a choice to go into monthly contribution or a choice of both.

The Benefits Of Investing In Unit Trusts

1. If you are keen to buy into big and sound companies but do not have enough means to subscribe to the minimum shares amount, a Unit Trust may allow you to do so at a fraction of a price (although usually you will be buying a Unit Trust that’s made of up different asset classes).

2. Unit Trusts can bring you out of Singapore. There are funds that are primarily invested in other countries which give you more investment opportunities to tap on their growing economy potential.

3. Unit Trusts can also bring you the same Capital Appreciation. As mentioned above that Unit Trusts are usually a collection of shares. So you do have the advantage of benefiting from it because the price of Unit Trust can still go up because of a few single asset classes. For shares, if you do not own it, you do not get to benefit from it.

The Disadvantages of Investing In Unit Trusts

1. Charges And Fees. Fund Houses and Fund Managers usually make their money through ongoing charges and fees. So if you are invested in a fund that’s heavy in fees and charges, this will eat up your profits year by year. This is different from shares as the charges are upon entry and exit of your investment.

2. No Dividends, Issue Rights And Voting Rights. You do not get to have such privileges unlike shares. Any dividends declared is usually factored into the pricing of the Unit Trust.

3. Performance Is Not That Clear. Unlike Shares, you cannot really determine how sound or the overall performance of the fund. All you can know is the past performance history (though not indicative of the future) of the Fund House and their list of Funds to make your judgment. You also get no say in their management and the holdings within the Unit Trusts.

To invest in your education on Unit Trusts, you can check out this online book store >> Books On Unit Trusts.

At this current stage, you should have a clearer picture of what are Stocks and Unit Trusts in general although this is not the full features and benefits of what these two investment tools can offer.

If you are interested to know how to make use of them to do some Financial Planning, please do engage your Financial Planner or engage me by dropping me a message.


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