Before we decide which is better to invest in between mutual funds and stocks, we need to know exactly what, each type of investment is. They both have their pros and cons, for some people mutual funds works great for them, and for others stocks is a better choice.
Let's find out the difference between mutual funds and stocks:
1. When you buy shares in a company, you are actually buying a share in the company's profit as well. This means you could either earn dividends from your shares of the company or you could go into losses when the company isn't doing well.
When you buy mutual funds, you are buying a portfolio of investment which could include ETFs, index funds, commodities, other investment funds.
2. The risk is much higher when you buy stocks individually because you need to do a lot of own research into the company's financial performance in the past, if you want to invest properly. This takes a lot of time and expertise to find the best stocks to buy in the market. Many people simply doesn't have the time or skills to pick the right shares of a company and they end up incurring big losses. Of course, the rewards is great also, if the company's shares rises quickly in value.
With mutual funds, the risk is much more spread out over many investments. So if one investment in particular sector isn't doing good, the other investment in other sector could sort of compensate for the losses. In a way, the risk is minimized due to many investments included in the mutual funds.
3. Stocks are usually managed by yourself and you do not have to pay someone to manage them for you, although there are people who do hire professional to manage their stocks for them. Investor usually pay for the transaction fees for buying or selling shares.
Mutual funds are usually managed by professional personnel and it can be an active or passive management. All the buying and selling of assets stocks, ETFs are managed by the appointed professional. Normally you pay fees to them for managing your mutual funds for you. It doesn't come out directly from your pocket but they to take their commission from the mutual funds that you bought from them.
4. With stocks, you can have the freedom and choice of choosing your desired shares in a company that you want to invest in. You can build your own favourite portfolios, buy or sell them with great flexibility.
With mutual funds, your choices are limited. You do not get to pick each individual stocks of a company. The investment portfolio are sort of already chosen by the professional managing the funds. These funds are invested in various sectors of the market and has a wide area of investment. However, you do have the choice of choosing the different types of mutual funds which are invested in different sectors of the market.
If you are a savvy investor and have done your homework properly, then investing in stocks makes sense for you. Buying stocks allows you to create your own investment portfolio and avoid paying management fees to someone to manage your stocks assets.
But if you absolutely have no idea of stocks or the financial markets and you still want to invest in the market, then buying mutual funds makes sense. With mutual funds, there are professional who manages your funds for you. They do all the hard work of buying and selling in the market. You stand to collect profit or losses at the end of the day. Your risk is minimized because you have someone with required financial expertise to help navigate the rough waters of the market. They have the responsibility of managing your mutual funds properly, so they won't intentionally mess up your investments.
If you do not know what you are doing in the financial market, you could quickly lose all your money just like that. In this case, mutual funds is the best and only sensible investment to go for. Many people have had success with investing in a mutual funds.
When you do decide to take to the rough water and start investing in stocks, you must be like Warren Buffett. Buy good strong company shares and hold them for many years. You profit from long term investment instead of short term gains. You need to be very lucky to earn good profit from day trading or short term investment. Not many people have the good luck and they end up losing all their money with short term trading. Instead you must opt for long term investment in a company's stocks.