If you have some money left over after paying all your bills and don't need any more toys, or if you are starting a smart and financially responsible gamble on some wealth that includes investment opportunities, you may be wondering whether buying stocks or mutual funds will give you the best return. When you think about how to set up a retirement fund, you might also think about this question.
To help make the right choice, you should know what stocks and mutual funds are.
Stocks: Most people think they know a little bit about stocks just because they hear the word "stocks" used in everyday speech. Stocks are small pieces of a company that anyone can buy on the stock exchange. Stocks are often sold in groups, so to buy one from a certain company, you usually have to buy at least a certain amount. Stockholders have a vested interest in the success of the company because the price of their stocks is directly linked to how well the company does. A sector is a grouping of stocks based on the type of business they represent.
Mutual funds are investments that bring together the money of many investors and put it in stocks, bonds, and other investments. Unlike stocks, which you usually manage on your own, mutual funds are usually run by a certified professional. Mutual funds are made up of many different kinds of stocks.
If someone wants to invest in stocks or mutual funds, it will mostly depend on how much they know and how much money they have. Many people will be tempted to buy stock because it seems like a "game" and they can invest in a well-known or easy-to-research company on their own. But the truth is that by the time stocks hit the market, they are usually already very expensive. Investing in individual stocks is a very risky move because your whole plan depends on the success of just one company. Even wealthy investors diversify their portfolios by buying different kinds of stocks, which the average person might not be able to do.
Mutual funds are a better choice for someone who wants to invest for the first time. Mutual funds combine the costs of many different stocks, which makes it less likely that you'll lose money and more likely that you'll make money. Mutual funds may not be as exciting as buying a lucky stock, but they are good investments for making money in the long run. Mutual funds are also run by professionals who know the risks and opportunities of the investment market. This reduces both the risk and the time it would take to pick individual stocks by doing research and making appointments. Mutual funds will also distribute the risks among several investors, and it is all managed by someone who likely has contacts within the financial world.
Mutual funds are a better choice for someone who has some extra money but doesn't have the time or knowledge to "play" the stock market well.
