Stocks against. Mutual funds: in which to invest?
Both stocks and mutual funds are popular types of investments, allowing investors to build portfolios and increase their wealth. However, although mutual funds often contain stocks, mutual funds and stocks have different characteristics that may appeal to different investors with different goals.
Here are the main characteristics, as well as the advantages and disadvantages, of stocks compared to mutual funds.
Stocks vs mutual funds
Both stocks and mutual funds offer ways to build a portfolio, but there are differences in how they work, as well as what you can expect in the long run.
- A Stock represents a share of ownership in a company. When a company like Tesla (TSLA) or Amazon (AMZN) does well, those who own stocks benefit. As the company grows in business, the share price usually rises with it, giving investors the opportunity to sell shares for more than what they bought them for.
- A mutual fund is a pooled investment which contains shares of many different assets. Many mutual funds include stocks and bonds. When you buy shares of a mutual fund, you get a share of whatever is included. Additionally, there are index mutual funds that track popular indices, like the S&P 500. Other funds can be actively managed, where a professional chooses what is included in the mutual fund based on different objectives. like growth or income.
The pros and cons of actions
Stocks offer a potentially valuable way to grow your wealth and profit from large price movements, but they also have some drawbacks.
- Easy to exchange – Individual stocks are easy to trade on a stock exchange, and there are a number of apps that make the process intuitive.
- Potential for significant gains – Depending on the performance of the stocks, you might see big gains. It could lead to more wealth down the road.
- Low trading costs – In many cases, stocks come with low trading costs. In fact, many brokerage firms do not charge a trading fee for individual stocks.
- Potential for significant losses – While there is the potential for big gains, you could also end up with big losses if the stock price goes down and does not recover.
- Research takes time – Finding stocks and choosing the assets that best suit your portfolio can take time.
- Stress – Investing in stocks can seem like an emotional roller coaster, and stress can make it difficult to sleep at night.
The pros and cons of mutual funds
Mutual funds can provide stability to your portfolio, but they are not foolproof. Here is what you need to know.
- Can be inexpensive – Many mutual funds, especially passively managed index funds, can be inexpensive, meaning they don’t charge a high expense ratio. In addition, some brokerage firms offer their own funds with no trading fees.
- Instant diversification – Because you invest in a basket of assets, you benefit from instant diversification, and therefore less risk, and you do not need to buy multiple individual stocks to diversify your portfolio.
- Can be less stressful – In some cases, investing in mutual funds can be less stressful than investing in stocks. If you are using an index fund, in particular, you are likely to keep pace with the market as a whole.
- Some funds have sales “charges” – There are mutual funds that charge a fee when you buy or sell stocks. These selling charges can cost you even before you start investing.
- Capital gains distributions – If the mutual fund has sold assets and recognized a gain, you may see distributions that create a taxable gain. So even if you haven’t sold your mutual fund units, you may still be subject to capital gains tax.
- Could underperform the market – If you have an actively managed mutual fund, it might not perform as well as the market and you might even lose money.
What is the best investment?
The suitability of stocks or mutual funds for your portfolio depends on your goals and tolerance for risk. For many investors, it may make sense to use mutual funds for a long-term retirement portfolio, where diversification and risk reduction might be more important. For those hoping to capture value and potential growth, individual stocks offer a way to increase returns, provided they can emotionally handle the ups and downs.
For beginners who have a small amount to invest: Starting with index mutual funds and making regular contributions can be an effective way to build a portfolio. Later, after gaining some experience, consider going into individual actions. Consider your goals carefully and use the investments to create a strategy designed to help you get there.
At the end of the line
Stocks represent stocks of individual companies while mutual funds can include hundreds, if not thousands, of stocks, bonds, or other assets. However, you don’t have to choose one or the other. Mutual funds and stocks can both be used in a portfolio to help you grow your wealth and meet your financial goals. Think carefully about how each might meet your needs and your personal investing style.