Mutual Funds or Individual Stocks?
Many investors start off using mutual funds or stocks. There are risks and benefits associated with each, and which one to begin with is mostly a matter of finances, as well as preference. Stocks are little pieces of ownership over a company.
It is, of course, not a substantial amount of ownership, that is mostly owned by larger corporations and businesses. However, it does grant the investor a vote in management.
Each piece of stock represents a portion of company earnings, however they do not always pay out.
Mutual funds, on the other hand, is a separate company that pools money from multiple investors in order to put that money into multiple securities. These combined holdings is the portfolio of the mutual fund. There are four basic types of mutual funds, and these pay out in different ways.
How One Makes Money Off Stocks
As mentioned above, stocks are shares of the company they are bought from. The more one acquires of the same stock, the more ownership one has over the company.
The biggest importance of stock ownership is the investor’s claim on their assets and earnings. The profits from the company is paid out with dividends when the company goes bankrupt, however if it is liquefied, one only receives what is left over after all the creditors have received payment.
On the bright side, there is a limited liability for all the investors, and they cannot be taken advantage of in the event of the company failing to pay its’ debts. Stocks are great if the company is successful, as one can earn a high amount of profit from these. However, if the business fails, one can lose out on their entire investment.
It is also true that a large portion of companies never pay out to their investors, as they are not obligated to. Stocks are higher risk, which is a downside to many who try to make a profit off them.
What About Mutual Funds?
With mutual funds, investors purchase shares in it’s portfolio. Each share represents the investor’s partial ownership of the funds, as well as the income they make.
It is generally popular among investors for several reasons. First of all, there are fund managers who handle everything for the shareholders. They do the research, as well as choose the securities to invest in and watch the performance of the companies. Mutual funds are much more diversified than stocks, as they invest in multiple companies and industries.
This means less of a risk, as not all the eggs are in one basket. It is much more affordable, as shares are sold relatively low price. Finally, it is easy to redeem one’s shares at almost any time for the current net asset value, as well as redemption fees.
With four types of mutual funds, one can decide what level of risk they wish to take! There are money market funds, the lowest risk of the four, which can only be used in higher quality, short term investments in US corporations. These are bigger companies with proven success, most often.
There are also bond funds, which are higher risk types that produce higher returns when successful. Stock funds are invested in corporations, and come in a variety of different funds from that. There are target date funds, which are a mixture of bonds, stocks and other investments. These are considered life cycle funds, as they are better for investors who are looking towards retirement.
So Which Do I Choose?
Mutual funds and stocks are both viable sources for income, however choosing which one is best depends highly on one’s financial situations.
Mutual funds offer payments in three different ways. They have dividend payments, which pay shareholders all the income they earn. There are capital gains distributions, which is distributed at the end of the year, and payments when the NAV increases. It is possible to lose some, or even all, of the money invested in either, as values and securities can fluctuate a lot.
It is important to remember that past performance is not an indicator of future performance, however one can use this to determine potential stability of the fund or stock.