Mutual Fund Basics
Mutual Funds vs. Stock Ownership: Which is Best for Your Investing Style?
by Michael Luftman (Write for us!)
(Click on the links within the article to get definition of that word)
When you purchase a share of stock, you
purchase a piece of a company. When you purchase a share of a mutual fund, you are purchasing a collection of stocks, bonds, and/or other securities with a group of investors. These shares are managed by an investment company.
So, which is better for your investing style - a stock share or a mutual fund share? The answer is, "it depends."
Managing yourself or leaving it to the pros.
If you have the time to research and manage your investment every day, you may find that stocks work best for you. However, if you would rather that the day-to-day management of your investment rest with trained professionals, a mutual fund that fits your tolerance for risk may be more appropriate.
The ability to
diversify.
You've heard it before - "don't put all your eggs in one basket." By owning individual stocks, you can certainly diversify your portfolio. But, again, this will take research and daily management. With a mutual fund, the portfolio manager may have included stocks in the fund that would cushion the blow should one drop. A mutual fund can include a few stocks and bonds to several hundred. Remember, there is relative safety in numbers.
The convenience factor.
When you own shares in a mutual fund, the record keeping of transaction s is handled for you and, periodically, you will receive a statement of your holdings. Stock transactions can be a more complicated experience. For example, you will need to keep track of your buys and your sells - this can be time consuming and complicated - especially at tax time.
Basically, those who purchase mutual fund shares do so because they want the diversification that mutual
funds can often provide and the convenience of leaving the investing - and reporting - up to the pros. For those that like the excitement of individual stock ownership and who don't mind the "paper trail," individual stock ownership is a viable option.
Working with your financial planner, you can not only determine which option is best for you, but also the type of investor you are, including your tolerance for risk and how the right investment plan can help you to reach your financial goals.
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