The Difference Between Stocks And Mutual Funds

Mutual funds differ from stocks not only in earnings potential but also in the risks involved. Mutual funds are definitely safer to invest in than stocks but have modest earnings compared to stocks. Many people though invest in mutual funds especially the majority who are just small investors.

To the new small investor who does not know his way around the stock market, investing in mutual funds is about the best option he can take. The investment in stocks require the services of a stockbroker who earns his keep through the commissions he gets for buying and selling stocks, and if the investment is just a small amount, any profit made may just be eaten by these fees. Big investors have an advantage, as stockbrokers often give them discounts, making the small ones think that stocks are only for those with big money. Thus the small investor would just go for the mutual finds which he can afford to buy, even at $100 a month installment payments

Mutual funds carry less risk because they are invested in several sectors which in effect lessen the risk, compared to a particular stock invested on one company. If some companies in which mutual funds are invested lose, this is balanced by the others who make good, so the risk of losing entirely an investment is minimized. Since mutual funds are owned by many people, the risk is also shared by them, with the individual taking only a small share of the risk.

Mutual funds are also already diversified, helping to insulate them from huge fluctuations in the market, such as those seen recently when the sub prime mortgage industry faltered, causing investors in real estate stocks heavy losses..

The principle that works in mutual funds is that many people share the profits when the investment makes good gains, but they also share the losses when the investment fails. There is thus a feeling and a sense of community and commonality, and shared risk among mutual fund investors. There is also a fund manager of mutual funds who is trained in the handling of stocks, serving the interests of mutual fund investors. The presence of the fund manager assures the investors that their money is in good hands.

Mutual funds are accessible to the small investor in many ways. They can be purchased from banks, online trading companies, and from a company's 401 (k) plans. When you invest in mutual funds you have of course to look into its past performance, and especially the reputation of the fund manager who will handle the placements of your investment. In a stock investment the details of your placement will be handled by you, as the stockbroker does not provide this service.