The terms of mutual funds and stock market are familiar to you but at this point you aren’t 100% sure of the differences. You are interested in diversifying your investment portfolio and to try to learn a bit more about the financial options out there.
Concept of a Mutual Fund
Mutual funds are a collective investment scheme, where a pool of investors’ money purchases a slice of the investment pie, under the guise of a mutual fund. Mutual funds are comprised of “stocks, bonds, short-term money market instruments, and/or other securities” (U.S. Securities and Exchange Commission) and is not a hard concept to grasp once you get your hands on a mutual fund investment guide (think of it as an introduction to mutual funds). The funds are managed by money managers and are a way for individuals to often invest in ways that wouldn’t normally be available to them on a one-on one basis. Although, many mutual funds include stocks as part of their package, the funds cannot be exchanged in that market. Mutual funds are redeemed directly between the fund and the investor and are not traded on the open market.
Stock Market Basics
The stock market is the trading organization where the bits of different companies (aka “stock”) are bought and sold. Individuals can purchase stocks independently through a number of companies that arrange those kinds of transactions. However, the stock market is not for the faint of heart and can fluctuate wildly. It is recommended that you acquire a book on stock market tips for beginners and start with the basic fundamentals of training.
If you’re thinking, “I want to invest in the stock market today,” you are on a very dangerous path because you can definitely lose money simply by paying transaction fees. Start slow and monitor current stock market conditions daily. Read up on financial news daily visit stock market analysis websites to learn the basics of how to read charts and predict trends. Opening a mock stock trading account is also highly recommended.
Deciding on an Investment
Both mutual funds and stock market investing are considered riskier investments. Neither is backed by the FDIC and just because investors put their money into them, doesn’t mean that they will make a profit of any type. Actually losses are common for both.
Because many mutual funds have stocks as part of their investment diversification, there is a direct correlation on the rate of return of the stock market and the rate of return of the money market investment. Mutual funds may often have less volatile investments in their assortment, allowing investors to hedge the risk of a great stock market loss more easily.
Playing with Mutual funds is a lower risk than playing with the stock market. If you put all your money into one stock, it is like putting all your eggs in one basket. If that basket drops, all your eggs will be cracked. A mutual fund is filled with diversified options, so you are putting their money into a variety of baskets.
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