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Mutual Funds vs. Stocks: How Should You Invest?

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If you’re just getting started as an investor, you might wonder whether you should invest in mutual funds or stocks. Both have their good and bad points. Mutual funds are probably less risky, but stocks have the potential for bigger returns. If you’re unsure about the difference between mutual funds and stocks, keep reading to learn more.

Mutual Funds vs. Stocks

The main difference between a mutual fund and a stock is that the former gives you investments in numerous companies, and the latter gives you an investment in only one.

A mutual fund pools money from many investors and uses it to buy shares of stock, bonds and other investments. The investors receive shares of the mutual fund relative to the amount they invested. Each share represents a part of the combined “basket” of investments.

Stocks are shares in individual companies. When you buy a stock you are buying a piece of the company, which means you’re a shareholder. Stocks are sometimes referred to as equities.

Stocks Mutual Funds
What It Is A share of an individual company. As a shareholder, you can make money by selling the stock at a profit, or by getting a dividend. A share of a fund that consists of a basket of different investments. The investments might be chosen to represent a particular sector or to balance gains and losses.
Who It’s Best For Investors who want potentially lucrative financial gains in the form of a rising stock price and/or dividends, as well as those who want voting power within the company. Those who want someone else to make their investment decisions. Most mutual funds are managed by professional fund managers who decide which stocks, bonds and other investments to buy and sell.
Costs and Fees You pay a trading fee when you buy and sell shares. When you sell, you will pay capital gains taxes on appreciation in the price. You might pay sales charges when you buy or sell shares, and you will pay management fees. Because mutual fund managers buy and sell positions within the fund, you might pay capital gains taxes even if you hold the fund.
Risk and Return When you buy a single stock, you’re betting on the success of that particular company. You’ll typically make a profit if the company does well and lose money if it doesn’t. Mutual funds are diversified, so they are inherently less risky than individual equities, but they can still lose money. Their gains and losses tend to be smaller than stocks’.
Learn More How To Invest In Stocks: A Beginner’s Guide Mutual Funds: Everything You Need To Know

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Pros of Mutual Funds

Investing in a mutual fund has some advantages over investing in individual stocks. Here are four important benefits:

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Cons of Mutual Funds

Mutual funds also have a few disadvantages, including the following:

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Pros of Stocks

Investing in stocks has certain advantages. Here are three of the most important ones:

Cons of Stocks

Just like with any investment, stocks also have potential drawbacks. Here are two of the biggest:

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Why Not Invest In Both Mutual Funds and Stocks?

Mutual funds and stocks both have pros and cons, so it’s important to assess which are most important to you before deciding on an investment vehicle. If you are very risk-averse, mutual funds might help you sleep better at night because they are better able to weather extreme market ups and downs. If you are willing to trade volatility for a much bigger potential long-term gain, then stocks might be the way to go.

Takeaway

On the other hand, there’s no reason you can’t invest in both stocks and mutual funds. In fact, a well-diversified portfolio will include both – as well as bonds, real estate and other investments. Investing consistently over time, monitoring your investments and taking the appropriate amount of risk will help you to be a successful investor, regardless of whether you put your money in mutual funds, stocks or both.

Vance Cariaga contributed to the reporting for this article.