Portfolio and direct investments are two approaches to investing that differ primarily how closely involved the investor is with the investment. The precise meaning of the terms can vary depending on the arena in which they are being discussed. Direct and portfolio investment have one meaning when it comes to foreign investing, for example, and a couple of different ones when used in the context of an individual investor acquiring shares of companies. Let’s compare both approaches.
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Direct Investment Basics
In direct investing the investor generally is relatively closely involved with the investment. For example, an individual investor can be said to invest directly when he or she purchases shares of individual companies rather than buying shares of mutual funds or exchange-traded funds.
Another type of direct investing occurs when an individual buys shares of a company without going through a stock broker. People can buy shares of some major companies such as Walmart in this way by using a service called Computershare. Employees of many publicly traded companies can also invest directly in shares of their employer without using brokers.
Direct investing can also refer to investors buying full or partial ownership in companies that aren’t publicly traded. This sort of direct investing is comparable to private equity investing, in which investors arrange to buy ownership interests in privately owned businesses from the owners rather than acquiring shares of publicly traded ones on public markets.
In international investing, foreign direct investment refers to a company or other investor gaining exposure to another country by means other than acquiring securities traded in the country’s stock market. A foreign direct investment by an automaker, for instance, might involve the automaker buying a foreign parts manufacturer. Foreign direct investment could also mean starting a new company.
Portfolio Investment Basics
Portfolio investment can refer to investing in securities by a pension fund, mutual fund or other institutional investment. This contrasts with direct investment by an individual purchasing stocks, bonds or other securities for his or her own account rather than buying shares in a fund. Foreign portfolio investment occurs when a company or investor uses the purchase of securities to participate in the economy of in another country. Typically, this means buying shares of publicly traded companies that are based in the foreign country.
Comparing Direct and Portfolio Investment
Portfolio and direct investing have distinct features that affect the cost, risk and other traits of investments made using the different approaches. These differences make them appealing and suitable for investors with varying goals and risk profiles, and less attractive for other types of investors.
Risk is one important way in which direct and portfolio investing differ. For instance, buying shares in a well-diversified mutual fund is inherently less risky than buying shares in an individual company. Acquiring shares of a publicly traded real estate investment trust (REIT) involves less risk than purchasing a single-family residential property and managing it yourself.
The cost of an investment also depends to an extent on whether it is a direct or portfolio investment. For instance, mutual funds and exchange-traded funds charge fees. Investors who buy individual shares of companies don’t pay these fees.
Similarly, individual investors who use Computershare to buy shares without going through brokers don’t pay brokerage sales commissions. However, Computershare does charge fees that must be compared to broker commissions to accurately evaluate any savings. Other direct investments, such as owning real estate properties, also involve different costs, which often are less than those required for portfolio investing.
Time is another point of difference when it comes to foreign investing. In foreign investing, portfolio investing by buying shares of publicly traded foreign companies implies less commitment to long-term investment in another nation’s economy than does buying a foreign company outright or otherwise directly investing. It can also require more time to analyze a direct investment than to select a portfolio investment, because information on performance and other traits of mutual funds and the like are standardized and readily available.
Return can also vary depending on whether an investment is direct or portfolio. A family office may buy a company instead of acquiring shares as a way to improve returns by reducing cost and allowing for more oversight than is afforded to shareholders.
Bottom Line
Direct investment and portfolio are two ways of investing that differ primarily in the presence or absence of middlemen, such as mutual fund managers, between the investor and the company or other asset to which the investor has committed funds. The difference can affect the risk, cost for transactions and management, length of time commitment and other factors. These differences can influence the relative attractiveness of an investment approach to a specific investor.
Tips on Investing
- A financial advisor can help you evaluate the investment approach best suited to your risk tolerance and overall financial objectives. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Liquidity is typically much greater in portfolio investing than direct investing. Shares of a REIT can be easily sold at any time, while it may take months and involve considerable added transaction cost to get rid of a real estate investment property.
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