What is the Difference Between Stocks and Mutual Funds?
The difference between stocks and mutual funds is that stocks are individual shares of a company, whereas mutual funds pool together multiple investors to purchase a variety of securities. Not only are stocks and mutual funds different by definition, but they're often managed differently; stocks tend to be managed individually or by a broker, whereas mutual funds are generally managed by a financial expert who decides what transactions to make and when.
When buying stock in a company, people are actually buying little slices of ownership known as shares. Depending on company performance, the value of those shares may go up or down. The conventional wisdom is to purchase and hold on to shares of companies that are likely to do well over a long period of time. Other investors, however, try to speculate on sudden upturns or downfalls in the market, which is more risky and requires a faster buying and selling technique.
Mutual funds contain an assortment of securities that are collectively bought by a number of investors. Mutual funds often contain stocks alongside bonds, commodities, and other investment vehicles. Mutual funds tend to be managed by a financial expert, who is in complete charge of buying and selling securities.
Mutual funds open up the stock market to a wider group of investors than individual stocks, as they're often more affordable than other kinds of securities. They also make it possible for investors to collectively invest in shares of a company that they could never afford on their own. Likewise, mutual funds often expose the individual investor to less risk by spreading out funds over a variety of securities. Mutual funds are similar to individual stocks in the sense that ownership of mutual funds is also sold in shares.
There are also investment vehicles that resemble both stocks and mutual funds, such as exchange-traded funds (ETF). ETFs are put together like mutual funds, but they behave and trade on the exchange market like stocks. Some investors believe ETFs perform differently than traditional mutual funds, and their different makeup means that investors buy and receive gains from ETFs a bit differently than from stocks and mutual funds.
It's not rare for investors to put their money into a combination of individual stocks and mutual funds. Diversifying an investment portfolio in such a manner can help spread out risk. For example, an investor might put a good chunk of money into a relatively safe mutual fund, which then enables the investor to invest other money into slightly riskier but potentially high-paying investments.
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