Some may think the idea of comparing stocks to mutual funds a little odd, since mutual funds are commonly made up of stocks, bonds, or some combination of both; it is necessary to compare the two when it comes to choosing which is best for your financial future. Below we will discuss some of the primary differences so you can make an informed decision about which choice best suits your financial needs.
Mutual funds are the best option for the everyday man or woman looking to invest. The high costs associated with buying, selling and trading stocks can eat up a significant portion of any profit. These fees are often used to divert the trading of stocks, instead of encouraging it. Contrarily, the big trading companies afford large discounts for their clients who spend more, making the stock market trading game seems more exclusive by making it easier for those who have a great deal invested than they make it for someone who is new to trading. Mutual funds offer easier access to those who don’t have a large disposable income to invest and need to take baby steps (such as $100 per month) toward their financial goals.
There is usually less risk when buying a mutual fund than with buying individual stocks. There are a lot of different reasons why this occurs. The first thing to consider is that mutual funds are not commonly invested in one sector, industry, or company. Therefore, if a particular stock performs poorly, the profits from the fund’s other investments will help balance out the loss and lessen the blow. This means any potential loss is actually shared by a large group and thus when a loss actually occurs, it will have much less negative impact than if you were the sole owner. The fact that the funds are already diversified helps protect from huge changes in the market like those seen recently when the sub-prime mortgage industry went belly-up, leaving many investors ducking for cover.
Share the riches. Spread out the risk. Mutual funds give a feeling of community, unity, and shared risk for those who buy into a particular mutual fund. In most cases this is an advantage since it allows a lot of investors to carry significantly less risk than if they purchased individual stocks on their own. There is a fund manager with extensive experience dedicated to managing the fund and doing everything possible to ensure it’s profitability. You will not see this if you are investing in stocks. When it comes to the stock market, the only people who care about how well your stock is performing are those that you pay such as your financial advisor, accountant, and/or stockbroker.
You should also be aware that mutual funds can be traded and/or used more easily than stocks. They are also cheaper to trade. A local bank, on the internet, and from online trading companies, and even at a company 401k plans are many places you can buy mutual funds. In simple terms, mutual funds try very hard to be accessible to everyone. Most importantly, when it comes to purchasing mutual funds, devote some time to researching the history and performance of the fund you’re thinking of investing in, in addition to the fund manager for your peace of mind.
There are many differences between mutual funds and stocks. For a small time investor, mutual funds are a good option to explore. For the small investor, mutual funds are commonly the best way to go since they are less risky, have less fees, and allow the owners to gain a slow and steady return on their investments.