Stocks and Mutual Funds

The beginner investor may question the difference between stocks and mutual funds. To begin with, mutual funds consist of a vast amount of collected money from a large number of investors. In buying shares in the fund, people will become shareholders. Actually, when investing in the fund, people are giving the money to the "expert" money manager of the mutual fund. He buys different bonds, stocks, and/or other assets that will satisfy the company's (or fund) requirements.

The advantage of mutual funds lies in the diversification of the stocks, which means investing in different companies. If money is invested in differing stocks, the decrease of value in one stock does not threaten the total worth of the funds. This becomes possible by other stocks appreciating in value whereas the one stock decreases in value. Thus, investors are not taking a high risk with their money, which suits them fine.

Also, funds are generally thought to be good investments for college savings, retirement, or any other financial goals which require time. If the investor has money which is not needed quickly, if he or she does not wish to take risks with money, or does not choose to spend time watching his/her investment, then mutual funds offer the best choice for each of them. Eventually, mutual funds do have capital gains which are distributed to the investors.

The disadvantage of mutual funds comes from the underperformance of the fund when compared to the stock market's average as represented by the annual S&P 500 Index. Also, 90 percent of mutual funds have not matched the market's average in the last ten years. If money managers are efficient at their jobs then why are mutual funds continuing to underperform?

Unlike mutual funds, stocks pose a higher risk for investors since investors are investing directly in only one company or a few companies. However, stocks do offer a higher return for the money. Through periods of time, the stock market has shown an average annual return of 11 percent. However, the stock market does fluctuate, causing loss for investors. Yet, stocks become profitable once again when the financial markets do eventually recover. Moreover, stocks should be thought of as long-term investments. Therefore, in considering all these factors, investors should find it a little easier to choose between stocks and mutual funds.