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Difference between stocks and mutual funds

Updated on August 17, 2016

News stories of fantastic profits elicit the familiar refrain, "If I bought that stock yesterday, I would be rich today!" Do those potential investors also feel relief by not owning stock when the same shares fall to a new low?

This often rough and unpredictable landscape can prevent many people from making those first investments that (emphasis: over time) usually lead to growth and greater personal financial security.

Two common investment approaches, stocks and mutual funds, each offer different outlooks for profit and risk. Stocks, or shares of an individual company, can rise and fall dramatically in value over the course of a single day. Knowing when to 'jump on or off the stock train' is, of course, the realm of much speculation and drives the business model of entire industries.

A wise strategy is to develop a diverse collection of stocks in order to temper the volatility of any one investment. Putting together an effective stock portfolio, an appealing prospect for its hopefully high and 'quick' returns, can be quite time intensive to research and create; one should consider the value of their time against the possible return on investment (ROI) as a factor in judging overall profitability.

Mutual Funds

With mutual funds, you are choosing a bundled, diversified assortment of stocks, bonds, and other assets. Think of a mutual fund as a pre-defined package containing many different securities (as many as 100 or more), while stock shares are individual securities with which you build your own portfolio. Mutual funds provide a good, relatively safe, introduction for beginning investors. While they have a place in anyone's investment plan, mutual funds require a smaller initial amount of cash and are possible because many different investors buy into the same fund.

Acquiring the same diversity with stock shares would be much more expensive. The goal of the mutual fund is to combine securities whose average value will achieve a particular return. That goal, or 'benchmark,' is usually compared to a known index such as the Nasdaq, S&P 500, or the overall Dow Jones Industrial Average. This gives the investor a quick reference to understand how well the mutual fund is performing compared to the overall market.

The specific securities that make up a mutual fund are compiled by financial managers and, of course, require management fees to pay for those experts. There may be additional transaction fees on some funds too, although, they may not be a factor as certain 'over performing' funds (those doing better than the benchmark index) may render those fees insignificant.

Check the fund's prospectus when evaluating performance to determine if any additional fees can be absorbed by the investment instrument's potential yield. With stocks, you are your own expert, unless, of course, you pay a broker or other advisor when selecting stocks. Neither approach of emphasizing stocks or choosing from one or more specific funds is necessarily better than the other. Neither is 'right or wrong' and investors must understand their own investment profile; that is, know your tolerance for day-to-day volatility, your comfort level with overall performance risk, and how much quuidity is available to create the portfolio that matches your investor personality.

Because an investment is a financial stake in an industry or company and their products, the actual businesses in which you make an investment may be important to you. The various stocks and securities that make up a mutual fund (the ingredients in the soup, if you will), are often closely guarded. Fund managers are competing with each other and are not eager to share the secrets of their success. By building a portfolio of individual stocks 'a la carte,' you know exactly where your money is going.

TD:LR

While stocks are the classic investment vehicle infamous in culture for the rise and fall of business dynasties and the dramatic creation of personal fortunes (or of financial ruinl), they are the backbone of corporate and industrial commerce and they are integral to most investment strategies including mutual funds. Mutual funds combine the wealth generating opportunities of the stock market with the increased peace of mind and lower risk of a well balanced and diversified portfolio at an affordable entry price. Both stocks and mutual funds are smart considerations for today's savvy investor.

Written by George Carlsson for Buffert.se - Lär dig spara pengar

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