In order to understand the difference between stocks and mutual funds, you have to have an understanding of what each is. We will look at the definition of each and delve into their differences.
What Are Stocks and Mutual Funds?
Stocks are equity instruments that offer ownership in a particular company for an exchange of money. The price of a company’s stocks relies on the company’s worth on the market. Stocks are listed on the stock exchange. Most online trading sites have a standard rate when it comes to individual stock trading. OptionHouse offers the lowest price at $4.75, with Scottrade coming in second at $7 a trade.
Mutual funds are investment vehicles that are comprised of funds that are obtained from several stockholders, all for the purpose of capitalizing securities. These securities can take various forms, such as bonds, stocks and other assets of similarity.
The Differences Between Stocks and Mutual Funds
Mutual funds do not require that much knowledge of the market and offer multiple options. Stocks, on the other hand, require a bit of research on the part of the investor and you whittle your choices down and pick one that is right for you.
Mutual fund prices do not change during the day. Their share price is determined using a value system that is identified by net assets in order to determine their actual share price. NAV takes the total of the fund’s assets, subtracts any fees involved (including the managers’ salaries) and divides by the fund’s total number of shares.
Stock trading, on the other hand, is a live event from the opening bell to the closing bell. If you have ever watched a stock ticker for any amount of time, you will have noticed that stock prices fluctuate regularly. A mutual fund will ensure that the investor sees a return on his or her investment. Stocks do not have this safeguard.
One final difference we will look at here is “choice.” When dealing with mutual funds, you do not have the option to pick and choose which commodities to invest in. That is left solely to the discretion of the manager. Stocks, on the other hand, leave purchasing discretion entirely up to the investor.
The Choice is Yours
Stocks and mutual funds can reward substantial returns on investments, however, keep in mind that they are not a guarantee for wealth and riches. Which of the two you choose is based on several factors. Do you want to be involved in the process of ultimately deciding where you money will be invested? Are you only willing to invest when there is a guarantee for a return on your investment? How much time do you have for initial research and following the market to determine when to sell?
Many first time investors choose to go the mutual fund route until they can get a bit more experience. You may have gotten some “sure advice” on investing in a company where purchasing stock would suit you better. Others may employ a strategy of using both. Whichever way you decide to go, mutual funds or stocks, remember that nothing is promised, and there is risk in both options.