What is a Stock Fund?
A stock fund is a type of investment in which many investors pool their money to purchase a combination of stocks. Fund managers control which stocks the fund invests in and individual investors control only the amount of money they contribute to the stock fund. Stocks are certificates that, in effect, grant the holder ownership of a small piece of a publicly traded company. Shares of stock in a company represent a fraction of ownership in the business. Buying into a stock fund allows investors to own small pieces of several companies all at once.
Diversification is a key advantage of buying into a stock fund over buying individual stocks. Instant access to dozens of stocks in as many companies is granted with the investment in one stock fund. Investing in dozens of individual stocks would take much more money and significantly more time to research each of the purchases. Risk is always an aspect of investing, but it is somewhat reduced through the diversification that comes with investing in a stock fund. Investing in one company will cost the investor if the stock loses money, while a stock fund will ideally profit — or at least break even — because one company's losses can be covered by another company's gains.
Lack of ownership of one particular stock is one shortfall of stock fund investing. Many investors like the feeling of owning a piece of one company and do not have the same ownership feeling when investing in a fund. While stock fund managers are required to provide regular updates about the fund's investments, it's not unusual for an investor not to know which companies' stocks are being held in the fund at any given moment.
Stock funds fall under the broader umbrella of mutual funds, in which investors pool their money and have a fund manager purchase a group of investment securities with the collective money. For a basic stock fund, the investment fund manager purchases mainly stocks for the portfolio. Such funds have added fees to pay the fund manager, but those fees also buy the fund manager's trading skills and knowledge. Many people like stock funds specifically because someone else is doing the majority of the investment work.
Other investment funds include index stock funds, which invest mainly in market index stocks. Growth stock funds concentrate their investments in companies that are rapidly growing at the time of investment. Sector stock funds might concentrate on a specific market sector, such as oil or agriculture.
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