Today, two of the most common forms of long-term investment are stocks and stock mutual funds. Investors can build wealth this way, but it’s good to know the ways that stock and stock mutual fund investing differ. Knowing these sometimes subtle differences will help you to make the right decision for you. These ideas are for informational and discussion purposes. However, the ideas below should in no way be seen as a replacement for your own decision-making.
Quick Tip for Every Investor
One major investment approach that everyone should take advantage of if possible with long-term investing and that will work with stocks, stock mutual funds, and any other long-term asset in which you invest is:
- Invest early in life, when you are young, even if the initial amount is small.
Difference Between Stocks and Mutual Funds
A stock represents a share of ownership in a single company. When the company is doing well, the stockholders reap the benefits. Investors looking to develop their portfolio by investing in specific companies should consider purchasing stocks.
On the other hand, a stock mutual fund is a pool of investments containing perhaps hundreds of stocks. Individuals seeking quick, easy diversification with many different shares should consider building a mutual fund portfolio.
Risk Factor and the Downside
The risk factors one must take into consideration when purchasing individual stocks:
- This form of investment holds the potential for significant losses should the stock price of a company drop and fail to recover.
- Choosing the right mix of stocks to invest in can also be time-consuming, and we benefit from experienced financial analysis to assemble a portfolio of stocks.
- Investing in stocks is sometimes stressful, especially during difficult economic times or when a company experiences challenges.
Stock Mutual Funds
The downside of buying into mutual funds includes:
- Mutual funds have expense ratios that may exceed 1% of an invested assets.
- Some funds charge a fee when you buy the fund.
- A fund is also not tax-efficient. Some may create taxable gains, which slows the growth rate.
- An actively managed mutual fund may fail to perform as well as the market overall.
Potential Reward and Other Benefits
- Today the process of trading stocks is easy, with many apps available to help investors and many firms seeking new brokerage accounts.
- Just as there is a significant potential for losses, there is also potential for large gains, leading to more wealth for investors.
- Trading costs for stocks have come down, and some brokerage firms don’t charge fees for individual stocks
Stock Mutual Funds
- One of the main benefits of trading in mutual funds is the low cost, with many brokerages offering their funds without any sales load or trading fees.
- Since investors are investing in a variety of stocks, it provides instant diversification, presenting lower risks.
- Mutual funds investors are also not so affected if a single company is hit with a scandal. Only the specified stock will lose, but the rest of the portfolio unaffected, reducing potential losses.
- By investing in index funds, an investor can keep pace with the market, regardless of the returns of particular stocks, making the investing process less stressful than with stocks.
So Stock Mutual Funds or Stocks?
Both of these two types of investments are popular, with stock mutual funds containing stocks. Their different characteristics, however, appeal to investors seeking other goals. Keep in mind that any investor can invest in both markets but arriving at the best combination of the two is mainly dependent on some specific factors. Those factors are the reward, risk, costs, and timeframe. These are the main guiding features that will consistently assist any person in deciding whether they ought to invest in stocks or stock mutual funds.
About the Author – David Milberg
David Milberg is currently a Senior Vice President at Milberg Factors. David has been with Milberg Factors, Inc. since 1995. Prior to joining Milberg Factors, he was a Vice President of Lehman Brothers in the Investment Banking Division, where he worked on stock offerings, debt offerings, and mergers and acquisitions. David Milberg began his career in finance at Bankers Trust Company in the Loan Sales and Syndications Group, which was responsible for syndicating and selling participations in loans to leveraged buyouts.
David Milberg is a graduate of Princeton University and received his MBA from the Columbia University Graduate School of Business.
Find out more about David Milberg and the team at Milberg Factors today by visiting the company website at https://www.milbergfactors.com/bio/david-j-milberg/.