The difference between stocks and investment funds
The main difference between stocks and mutual funds is that stocks are a representation of the share a person owns in a company in the market, whereas mutual funds are a portfolio of different assets managed by an asset management company.
A stock refers to owning a stake in a company that is part of the company’s assets or earnings, and can be acquired by anyone as long as the company is available to the general public.
The mutual fund includes a group of assets that may be represented in stocks, bonds, currencies, etc., gathered in one portfolio for the purpose of diversification and risk reduction.
The difference between stocks and investment funds
1- The share is always owned by an individual investor and indicates the percentage of his ownership in the assets and profits of the company. On the other hand, a mutual fund is an investment of funds pooled by several small investors in a group of assets such as stocks, debts, or bonds, and then managed in a fund.
2- While the performance of stocks depends on the overall performance of the company and is affected by the same factors that affect the overall economy of the sector to which it belongs, the performance of mutual funds depends on the skills of the fund managers and the set of assets that it includes.
3- The board of directors determines the equity strategies, this means that they can change according to the prevailing conditions and the skills of the managers. As for mutual funds, the rules and regulations are determined as per the prospectus of Red Herring and it is also very important to follow them because the main objective of this type of investment is to outperform the returns offered by the market without affecting the principal amount invested.
4- Stocks represent the share of ownership for investors, while mutual funds provide partial ownership of the overall basket of securities.
5- The investor can be the individual responsible for the management or it can also be done by appointing a stockbroker. In contrast, mutual funds are managed by a professional fund manager on behalf of the investors.
6- The element of risk when investing in stocks is greater, as the investment is directed to one company. In contrast, mutual funds offer the advantage of diversification, thus providing strong profit opportunities even in the event of failure in one company or sector.
7- Shares can be traded at any time during the day, while mutual funds are traded only once a day.
8- The value of the shares held by the investor is determined by multiplying the individual share price by the number of shares, while the value of mutual funds can be calculated through NAV, which is the total value of assets after deducting expenses.
9- Shares get regular returns in the form of dividends earned and it can vary depending on the company’s performance and the decisions taken by the management. Mutual funds aim to provide regular dividends to investors as well, and they also provide a timely statement on the performance of the fund as a whole, which helps investors in making a decision.
10- The stock investor is directly responsible for the returns in the stock market as he directly manages them, while the fund manager is not directly responsible for the results.
Summary
Investing in stocks or mutual funds is a completely personal decision, so one must understand the pros and cons associated with each before making any critical decisions. Both options are suitable for small investors with limited investments, and although stocks provide an opportunity for direct investment in the stock market, one needs regular tracking of performance to determine a future course of action in order to fully assume the risks and rewards.
On the other hand, mutual funds provide a good opportunity for diversification which is necessary when risk is spreading or if one sector is going through a difficult phase. Besides, these funds are managed by professionals which relieves the investors from the constant monitoring of their investments.
Depending on risk tolerance, investors should consider either or both opportunities, and the investment time horizon aspect should also be considered since both stocks and mutual funds can be held in the short, medium or long term.
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