Mutual Funds vs Individual Stocks

Once you decide to start investing you might get puzzled by the options and institutions that offer investing services. Individual stocks, Mutual funds, ETFs, Brokerage firms, Derivatives market, Bond market are just some of the options. 

Some of the options are easy to understand and deal with whereas others need you to have knowledge and experience. The most common choice that a newbie investor might have to do is between investing in a Mutual fund or investing in an Individual stock. So how does it work and what's the difference between them?

Mutual Funds

A Mutual fund is a pool of investments that is being used to buy various stocks and create a diversified portfolio. Interest rates in a Mutual fund are slow and steady and you shouldn't expect high returns. Fund managers use your investments to buy stocks and manage your account so you don't really need to do anything. That's why they consider  it to be a passive form of investment. 

When it comes to different fees that a Mutual fund might charge you it is important to learn about them before purchasing any shares. Those fees could include manager's fees, front-end load fee, back-end load fees, transaction fees etc.

There is a huge number of different Mutual funds and they might  be specializing in some industries like Commodities, Technology, Currency and so on. So the most you can do is to pick an industry and trust your money to the fund. Other decisions you might have to make are: Do you want to get the dividends or you want to reinvest? Do you want to buy some special amount of shares or you want to purchase shares on a set dollar amount? Investing in a Mutual fund doesn't require you to have any special knowledge and very basics is enough. 

Individual Stocks

If you decide to act on your own then you need to pick Individual stocks that are the most appealing to you and invest directly into them through Brokerage firms. As compared to mutual funds you don't need to pay any fees except transaction fees that a Brokerage firm might apply. 

The difficult part here is that you need to have some knowledge and a good understanding of what you are doing to your own money. You need to pick a stock and make your own analysis on the company to make sure that's it's not going to go bankrupt the next day. There is no one to do the work for you so you need to spend a significant amount of time on analysis and prognosis. 

As an option you might decide to follow some advises of Investment bloggers or professionals who post for different websites or periodicals. But then you completely entrust your money to the person's opinion who doesn't guaranty you anything and just shares his/her opinion. That's why you need to have some knowledge to at least understand what you are doing and why you are doing it to be more on a safe side.

If you like investing and want to turn this activity into your hobby and spend time on it weekly then of course you will eventually gain a deep knowledge and become a sophisticated investor. But if you are too busy and simply don't want your money to stay still and work for you then it is better to entrust it to a Mutual fund and get slow but at least steady returns.