Are you interested in investing but not sure what you want to invest in? You’ve heard of mutual funds and trading stocks but aren’t sure which is better? This article will go over both and compare and contrast the two to help you make an educated decision.
What are mutual funds?
Mutual funds are a collection of stocks and bonds that can meet financial goals such as retirement or college savings. As the name implies, when one invests in a mutual fund, they join together to purchase many different types of investments at once (though most often, it’ll be stocks or bonds). Since this allows for diversification, it lowers risk by increasing your chances that some gains will offset any potential significant losses.
Also, since these are professionally managed, they can provide their employees with education and training that most wouldn’t have access to. The fees are usually under 1% of the total value, but it varies depending on the type of fund. There are many different types of mutual funds, so if one doesn’t meet your specific financial goals, others are available for you to choose from. Though mutual funds can be a great resource, it takes some time and effort to research which ones work best for you.
While a mutual fund may seem like a good investment, it might not be the best option. A lot of financial advisers recommend against using index funds because they are not as profitable as other forms of investing.
What are stocks?
Stocks are something that seems to entice many people, especially investors. Stocks offer the opportunity for high returns on investments over a short period and can be quite profitable for those who know what they’re doing. Trading stocks involves buying shares in individual companies. Most people purchase stocks through brokers online or at their local bank, though some trade directly with other individuals without any broker involved. Stocks are bought and sold every day through stock exchanges around the world. Every time a stock is sold, part of that sale goes to the company itself, and part of it goes to the broker.
Unlike mutual funds, individuals are able to acquire just one single stock if they choose. However, stocks are riskier than mutual funds because you are not diversifying your investments across multiple companies but putting all your money in one specific company’s success. If something terrible happens with that company or some form of scandal, you will lose all your investment. Also, keep in mind, most brokers charge fees for buying and selling stocks under certain circumstances (such as placing limit orders), so make sure to investigate any fees before making an order through them.
On the whole, trading stocks allows for much greater control over which companies you invest in. However, since this is often done individually instead of as part of a mutual fund, more fees are involved and greater risk.
Mutual funds vs stocks
Both types of investments offer their investors numerous advantages, but there are some significant differences between them. Both products offer similar returns when held for long periods in a non-volatile market in terms of capital appreciation.
However, in a volatile market, mutual funds tend to be a safer bet as they are typically diversified across many stocks. It reduces the risk associated with any one stock losing value. Trading stocks offer investors more gains but at a higher risk, as it is easier for one stock to go wrong and derail your entire portfolio as opposed to multiple assets going wrong simultaneously in mutual funds.
Finally
Before making any investment, it’s essential to carefully weigh the pros and cons to invest your money appropriately for your goals. Do some research on mutual funds and stocks, and speak to an online broker from Saxo Bank to help you choose the one that fits you best.
