The Difference Between Mutual Funds and Stocks

Stocks differ from mutual funds, not only in earnings potential, but also in the risks involved. Mutual funds have modest earnings compared to stocks, but are definitely a safer investment. Many people invest in mutual funds, with a majority being 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.

There are many ways that mutual funds are accessible to the small investor. Mutual funds can be purchased through online trading companies, from banks, and from a company's 401 (k) plans. When investing in mutual funds you must look at the funds past performance. It is also important to look at the reputation of the fund manager who handles the placements of your investment. With a stock investment, the stockbroker does not provide this service, and the details of the placement will be handled by you.

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