Understanding the Difference Between Shares and Funds

Two Ways to Access the Stock Market

When most people think about investing in the stock market, they think about buying shares in individual companies — Apple, Tesco, BP. But the majority of UK retail investors actually invest primarily through funds — vehicles that pool money from many investors to buy a diversified collection of shares, bonds, or other assets. Both approaches give you exposure to stock market returns, but in very different ways with different risk profiles, costs, and demands on your time.

What Are Shares?

A share represents a direct ownership stake in a specific company. When you buy 100 shares of Tesco, you own a tiny fraction of that specific business. Your return depends entirely on how that one company performs: its revenues, costs, management decisions, competitive position, regulatory environment, and the broader economy. If Tesco prospers, your shares rise in value and you may receive dividends. If Tesco struggles, your shares fall. If Tesco goes bankrupt, you may lose your entire investment in those shares.

Owning individual shares requires research — understanding the company's business model, financial health, and valuation — and ongoing monitoring as the company's circumstances change. Most financial advisers suggest holding at least 15 to 25 individual stocks across different sectors and geographies to achieve adequate diversification when investing in individual shares.

What Are Funds?

A fund is a pooled investment vehicle that collects money from many investors and uses it to buy a portfolio of assets — typically dozens to thousands of individual shares or bonds. Each investor owns units or shares in the fund, proportional to how much they have invested. The key advantage of funds over individual shares is instant diversification: a single investment in a global index fund gives you exposure to thousands of companies across the world, dramatically reducing the impact of any single company's failure on your overall portfolio.

Funds come in two main varieties: actively managed funds, where a professional manager makes decisions about which assets to buy and sell in an attempt to outperform the market; and passive index funds or ETFs, which simply replicate a market index at very low cost without attempting to pick winners.

Cost Comparison

Buying individual shares costs a dealing fee each time you transact — typically £0 to £12 per trade depending on your platform — plus 0.5 per cent SDRT on UK shares. For a diversified portfolio of 20 stocks, building this through individual share purchases could cost £50 to £250 in dealing fees and SDRT just to establish the initial positions. Index fund ETFs bought in a single transaction on a zero-dealing-fee platform like InvestEngine cost nothing to purchase beyond the OCF of typically 0.07 to 0.22 per cent per year — and this single purchase immediately provides exposure to thousands of companies.

Time and Expertise Required

Investing in individual shares well requires significant ongoing research: reading annual reports, tracking quarterly earnings, monitoring industry news, and evaluating management quality. Investing in an index fund requires almost no ongoing attention — the fund replicates its index automatically. For most UK investors with limited time and expertise, index funds provide superior diversification at lower cost with minimal maintenance. Individual shares suit investors with the knowledge, time, and genuine interest to research companies in depth.