A few people do not quite understand the difference between stock and mutual funds, and therefore, often get it all mixed up. Stock market investing means an investor is directly investing in the stocks of a corporation publicly listed on a stock exchange. While the mutual fund is a collective approach that allows a group of investors pool funds together to invest in various investment vehicles such as stock, bonds, real estate, etc. Both stock and mutual funds hold crucial benefits and quite a few similarities. However, the major difference between stock and mutual funds is the number of investors involved in both of them.
In the stock market, an investor can own a collection of shares in the stock of a corporation. Thus, indicating the direct proportion of ownership they have in the company. While a mutual fund is owned by a group of investors who decide to pool their money together to invest in multiple investment vehicles or financial instruments such as stocks and bonds.
In the stock market, the overall performance of a stock is dependent on the company or corporation that owns the stock. There may be only little the investor can do in determining the productivity or performance of the company unless in a few cases. Whereas, the performance of mutual funds doesn’t necessarily depend on macroeconomic factors but abilities and skills of the fund managers. Also, mutual funds’ performance can be determined by the pool of securities involved in turning in good returns per time.
Investing in the stock market is riskier than mutual funds. Mutual funds support diversification where one investment can offset the risk in another. Its multiple-investor nature also allows that all the investors involved in a mutual fund equally share in the losses. Whereas, stock investing exposes the single investor to grave losses to bear alone. The stock market is a high-yield high-risk type of market and high-risk tolerant investors get the best out of it.
Investing directly in the stock market exposes the investor to more volatility compared to mutual funds which offer diversification. Mutual funds support investing in multiple investment vehicles at the same time. A single fund can contain various securities such as stocks, bonds, real estate, etc. Due to its diversified condition, the volatility of mutual funds is less compared to the stock market. If a particular investment in a mutual fund is underperforming the market the other well-performing investments can offset the underperforming investment.
Compared to mutual funds, the stock market has a higher return potential as many of the top global investors have built their wealth over time by investing directly in the stock market. On the flip side, many investors including the top global investors have countlessly lost money in the stock market. The stock market, like many high-yield investments also has high-risk potentials, therefore, high-risk tolerance investors are most likely to benefit from the stock market returns. Mutual funds may not have high records of investment returns like the stock market, however, they also have the ability to make good returns for their investors. Although mutual fund returns may not be ideal for big investors, it is still a good way for average investors to steadily build wealth.