What Is a Common Stock Fund?

A common stock fund is a mutual fund that pools the investments of multiple sources and invests in the common stock issued by various companies. This common stock is generally available to all investors but lacks the benefits of preferred stock, which pays off regular dividends to investors. The main benefit of a common stock portfolio is that it provides excellent portfolio diversity with a single investment. Judging the performance of a common stock fund is done by assessing its net asset value, which is the combined value of all of the stocks included in the fund at one time.

Diversity within a portfolio is highly sought after by individual investors. Having diversity means that an investor has access to numerous investment opportunities, thus raising the potential for profits. It also means that there is less chance for financial calamity, since a single investment's poor performance would be balanced out by the other securities included in the portfolio. One way that investors can achieve this diversity is through a mutual fund, and a common stock fund is one of the most popular mutual funds available.

To understand what a common stock fund involves, it is important to understand what a common stock actually is. Common stock is issued by companies to all investors, who benefit when the share price of the stock rises. Unlike preferred stock, however, common stock offers no guarantee of dividend payments. The financial ruin of the company issuing the stock would also place common stock investors lower on the list of creditors receiving recompense than those holders of preferred stock.

In order to get access to a large variety of common stocks, investors might want to try out a common stock fund. This is a type of mutual fund which requires that a minimum investment be included. Funds are collected by fund managers, who then have the ability to choose the common stocks that will be included in the fund. As the investments within the fund rise and fall, so too does the value of the individual investors' capital within the fund.

Investors should understand how a common stock fund is managed before proceeding with their investments. This can be done by inspecting the investment prospectus, which lays out all of the details of each particular fund. The prospectus can show key information like the investment strategy of the fund managers, as well as their track record and the fund's past performance. In addition, the prospectus shows the fees that are owed to fund management, which can take away from the return on investment is they are excessive.