Understand the Pros and Cons of Stocks
It may seem a little strange to compare mutual funds with stocks but you should so you make the best decisions to secure your financial future. Some of the more notable differences will be discussed below in order to help you decide which investment type is more suitable for your financial situation.
When it comes to investing for the everyday man or woman you really can’t beat mutual funds. Stocks carry hefty fees for buying, selling, and transferring that significantly hinder any profits that would otherwise be made from the transaction. In fact, these fees often serve to deter the trading of stocks rather than encouraging it. Perversely, big trading companies offer hefty discounts for their big spenders making the stock market trading game seem even more exclusive by making it easier for those who already have a great deal invested than they make it for the new guy trying to make his way on the market. Mutual funds are much more accessible to those who don’t have massive fortunes available to invest and need to make small steps (such as $100 a month) towards their financial and investment goals.
Mutual funds typically carry less risk than the average stock purchase as well. This happens for many reasons. First of all mutual funds are not generally invested in one sector, industry, or company. For this reason if one of the stocks fails, the proceeds from the other stocks and bonds purchased will help mitigate the loss, making it less noticeable. At the same time, the loss is shared by a large group of people so that even if a slight overall loss is experienced as the result it will be much less noticeable than if the stock purchased was yours and your alone. Finally, the fact that the funds are already diversified to a large degree helps insulate from huge fluctuations in the market such as those seen recently when the sub prime mortgage industry bubble popped leaving many investors ducking for cover.
Share the wealth. Share the risk. Mutual funds offer a sense of community, commonality, and shared risk among those who buy into a specific mutual fund. This is a good thing most of the time as it enables a large group of people to share a much smaller portion of risk than if they were buying stocks of their own volition. The existence of a fund manager means that there is someone “in the know” who is looking after the profit of the fund and that has the success of the fund at heart. This is something that you won’t find when investing in stocks. In fact, when it comes to the stock market the only people that really care about how your stocks are performing are those that you pay to care for these things such as your financial advisor, accountant, and/or stockbroker.
Another reason that mutual funds are popular and may be for you is that they allow the little guy to invest. In a world full of little guys it is nice to know that we too have the opportunity to make some money in the market and secure our financial situation when we reach retirement age. Buy ins for mutual funds are much smaller than it would be to purchase stocks on your own because there is a group of people who are essentially pooling their monies together in order to make the purchase. Not only is the risk spread throughout the group but also the buying power is multiplied.
As you can see there are a lot of differences between stocks and mutual funds. For small investors mutual funds are often the best route to take. Mutual funds are less risky and will give you good growth over time.
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