Most investors are unsure whether to invest in the stock market or in mutual funds. Stocks and mutual funds are both popular investment vehicles that enable investors to build portfolios and grow their wealth. The following are the key differences between stocks and mutual funds.
Stocks vs. mutual funds
A stock is a share of ownership in a company. When a company, such as Tesla or Amazon, performs well, those who own shares benefit. As the company's business expands, so does its stock price, giving investors the opportunity to sell shares for more than they paid for them.
A mutual fund is a pooled investment that includes shares of a variety of assets. Many mutual funds hold a diverse range of stocks and bonds, sometimes hundreds. When you buy shares in a mutual fund, you get a piece of everything. There are also index mutual funds that track popular indexes such as the S&P 500. Other funds may be actively managed, in which a professional selects what is included in the mutual fund based on various objectives such as growth or income.
Which is a better investment?
Stocks or mutual funds are better for your portfolio depending on your goals and risk tolerance. Mutual funds can make sense for many investors in a long-term retirement portfolio where diversification and risk reduction are more important. Individual stocks offer a way to boost returns for those hoping to capture the value and potential growth, as long as they can emotionally handle the ups and downs.
Starting with index mutual funds and making regular monthly contributions can be an effective way to build a portfolio for beginners with a small amount to invest. Consider diversifying into individual stocks once you've gained some experience. Consider your goals carefully and use investments to develop a strategy to help you get there. Consider these low-risk investments for your portfolio if investing in the stock market feels too risky for you.
Both mutual funds and stocks can be used in a portfolio to help you build wealth and meet your financial goals. Before investing make sure you do your research.