If you happen to have some money left over at the end of all the bill payments and you have no need for any more toys, or even if you are beginning a prudent and fiscally responsible gamble on some wealth that incorporates investment opportunities, you may find yourself wondering whether investing in stocks or purchasing mutual funds will offer the best returns. You might also consider this question when considering how to set up a retirement fund.
In order to help make the decision, it is important to understand what stocks and mutual funds are.
Stocks: Most people believe they have a basic understanding of what stocks are, simply because of their exposure to the term in everyday usage. Stocks are individual bits of a company that are available to be purchased by the public in open trading on the stock exchange. Stocks are often sold in bundles, and thus, purchasing a stock in a specific company often entails some kind of minimum purchase. Stockholders have a vested interest in the company’s well-being as the price of their stocks is directly related to the company’s performance. Stocks are divided according to the kind of business they represent, which is known as a "sector."
Mutual Funds: Mutual funds are collective investments that pool the money from a lot of investors and invest it in stocks, bonds, and other investments. As opposed to the individual management of stocks, mutual funds are usually managed by a certified professional. In essence, mutual funds incorporate many types of stocks.
The decision on whether or not to invest in stocks or mutual funds will primarily come down to the personal expertise and wealth of the individual. Many people will be tempted by the "game" aspect of buying stock, as well as the chance to invest solely in a company that is well-known or can be easily researched. The fact is, however, that by the time stocks become available on the market, they are generally already highly priced, and investing in individual stocks is a highly risky maneuver, as your entire process hangs on the well-being of just one company. Even wealthy investors diversify their portfolios by investing in several types of stock, and this can simply be unaffordable for the average person.
The best bet for a beginning investor is to purchase mutual funds. Mutual funds will pool the costs of many stocks, lowering the risk of loss while increasing the chances of profit.Mutual funds may not provide quite the excitement of investing in a lucky stock, but they are good investments for a long-term financial opportunity. In addition, mutual funds are managed by professionals that are well acquainted with the pitfalls and opportunities of the investment sector, which will cut down on both risk and the time it would take to pick individual stocks through research and appointments. Mutual funds will also distribute the risks among numerous investors, and it is all managed by someone who likely has contacts within the financial world.
For the individual with some extra money who does not have the time or the expertise to properly "play" the stock market, mutual funds will prove the better option.
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