Differences Between Stock and Mutual Funds

This topic focuses on churning money in a short period. Investors can use these avenues for a quick investment return or hold it for an extended period.

  • A stock indicates owning a share in a Corporation representing a piece of the Firm’s assets or earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments.read more. Any person willing to contribute to the company’s capitalContribution To The CapitalContributed capital is the amount that shareholders have given to the company for buying their stake and is recorded in the books of accounts as the common stock and additional paid-in capital under the equity section of the company’s balance sheet.read more can have a share if available to the general public.On the other hand, a Mutual Fund involves pooling in small savings of various investors and accordingly investing in the stock market to garner returns on the initial investment. As stated in their Prospectus, these investments can be made in stocks, bonds, or a combination of multiple securities. Let us look at their differences with a deeper understanding of these investment avenues.

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Stock vs Mutual Funds Infographics

Key Differences

  • A stock is a collection of shares owned by an individual investor indicating their proportion of ownership in the assets and earnings of a corporation. On the other hand, mutual funds are a pool of money from several small-scale investors further invested in a portfolio of assets. These include equity, debt, or other money marketMoney MarketThe money market is a financial market wherein short-term assets and open-ended funds are traded between institutions and traders.read more instruments.The stock performance depends on the company’s overall performance in which the investment is made and the sector. Various macroeconomic factors can have a direct impact. Mutual funds’ performance depends on macroeconomic factorsThe Macroeconomic FactorsMacroeconomic factors are those that have a broad impact on the national economy, such as population, income, unemployment, investments, savings, and the rate of inflation, and are monitored by highly professional teams governed by the government or other economists.read more, but the skills of the fund managers and the pool of securities can help maintain stable and regular returns.The board of directors determines the strategies of stocks. It can change according to the prevailing conditions and the directors’ skills. In contrast, the rules and regulations in Mutual funds have been stated as per the Red Herring ProspectusRed Herring ProspectusThe term “Red Herring prospectus” refers to the preliminary prospectus that a company files with the SEC in relation with its initial public offering. It contains information about the company’s operations but does not include details about the prices at which securities are issued or their numbers.read more. It is essential to follow the rules as per the Prospectus since the aim is to beat the returns the market offers without impacting the principal amount invested.Stocks represent an ownership stake to the investors, whereas mutual funds offer fractional ownership of the overall basket of securities.The investor is individually responsible for the management and administration of the stock, which can be done by appointing a stockbroker. Conversely, mutual funds are managed by a professional fund manager on behalf of the investors.The risk component in the case of stocks is larger as the investment direction is in a single company. In contrast, Mutual funds offer the benefit of diversification, thereby offering robust earning opportunities in case of failure in a single company or sector.The trading of stocks can take place at any time during the day, including intra-day trading at the current price, whereas mutual funds are traded only once a day, probably at the end of the daily basis in which the NAV is finalized.The individual share price of the stock is multiplied by the number of shares determining the value of stock held by the investor. On the other hand, the value of the mutual funds can be calculated by arriving at the NAV, which is the total value of assets net of expenses.Mutual funds aim to offer regular dividendsDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more to the investors and more than that offered in the market. They also provide a timely statement on the performance of the general fund, which helps investors in decision-making. Stocks get regular returns in the form of dividends earned and can vary depending on the firm’s performance and decisions taken by the management.The stockholderStockholderA stockholder is a person, company, or institution who owns one or more shares of a company. They are the company’s owners, but their liability is limited to the value of their shares.read more is directly responsible for the returns in the stock market as the investor is directly managing the same. In contrast, the fund manager is not directly responsible for the results. However, their increment and commission depends on the funds they manage.

Comparative Table

Conclusion

Whether investing in stocks or Mutual funds is a completely personal decision, one should understand the pros and cons of each avenue. Both of these options are suitable for small-scale investors with limited investments. Though stocks provide the opportunity to invest in the stock market directly, one needs to keep a regular track of the performance to decide the future course of action. The investor completely bears the risk and rewards.

On the other hand, mutual funds provide the cushion of diversification in the basket. It is helpful as the risk gets spread out in case one sector is going through a difficult phase. Besides, these funds are managed by professionals within the ambit of strategies committed. Hence the investors can be relieved of constant monitoring of the investment.

Thus, depending on the risk-taking ability and term of investment, investors shall consider either or both of the opportunities. The duration aspect also has to be considered since both stocks, and mutual funds can be held for the short, medium, or long-term.

Stock vs. Mutual Funds Video

This article has been a guide to stocks vs. mutual funds. Here we discuss the top differences between stocks and mutual funds, infographics, and comparative tables. You may also have a look at the following articles for gaining further knowledge in finance –

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