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Difference Between Mutual Funds and Stocks

stock-market-dbMutual Funds vs Stocks

A familiar question, what is the difference between mutual funds and stocks? This is a debate that is, more often than not, left unresolved, because people were unable to find the heart of these topics.

Stock investment is where the investor will need to purchase shares offered by a specific company. Once the shares are purchased, the investor hopes to draw a profit from his investment. The investor’s profits will increase if the value of the shares grow, and likewise, should the value of the shares fall, the investor will face the failure of his investment. This is the basic nature of stock investing.

On the other hand, mutual funds, instead of being shares from one specific company, comprise of a collective group of stocks, bonds and securities. In this case, the investor is hoping for significant profits from his collective group of investments. Stocks that do well can make up for the shortcomings of the stocks that have not performed so well, and this is an advantage of a mutual fund investment. This process can actually become quite lucrative, and is a popular form of investment across the globe. A mutual funds investor can acquire even more revenue, should his collective group of stocks perform well.

Therefore, we ask the basic question once more, what is the difference between mutual funds and stocks? The answer is now clearer: A mutual funds investor will seek profit from a collective group of stocks, while a stock investor will hope for gains from shares of a single company. The overall risk factor for the mutual fund investor is lower than that for the stock investor. As an explanation, should one or two of the stocks from the collective group fail to provide profits, it is not too much of a problem, because other stocks from the collective group could be performing extremely well, and therefore, covering your losses from the failing stocks. Stock investing has more associated risk, as you are relying on the performance of only one company. Mutual funds and stocks work with different principles in the market, but it is this basic diversification that sets the two investment options apart.

Many people prefer to invest in mutual funds, but it is clearly a choice for the individual.

Summary:

1.Mutual funds comprise of a combination of various stocks, bonds and securities.

2.Investing in stocks is buying the shares of a single company.

3.A share in a mutual fund investment is similar to buying many smaller stock shares. They are considered to carry lower risks, because they offer diversification.

4.If you are investing in the stock market, always make index funds the core of your investments.


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