Difference Between Stocks and Mutual Funds (With Table)

Everyone needs to earn for surviving and living a good life. Well, to have a good life with a sustainable future. Earning along with saving is important, and from that saving to some percent of it should be invested wisely to increase the value of the saving. Otherwise, it would be the same for years, and there will be no increase.

To invest money, it is important to know about the several investment options available in the market. And with all the information of the pros and cons, the investment should be made. Two available investment options are mutual bonds and bonds. Both of them have similarities, and that’s why it is important to know the difference to choose the better option as per the conveniences.

Stocks vs Mutual Funds

The difference between stocks and mutual funds is stocks individual himself investment in the corporations and takes all the decisions while in the mutual fund he only investment in a company that further invest the money in securities, the major decisions are taken by the fund managers or professionals. Returns are higher in stocks along with the trading cost than mutual funds. They also differ in terms of risk, diversification, denomination, suitability, original issuance, market knowledge, etc.

Stocks represent the percent of ownership of a corporation. It is a form of security that indicates the securer has ownership of some proportion of the company or corporation. It is sold and bought under stock exchanges in the stock market. It has some assets restrictions too. Stockholders have control over the investment. Prior knowledge of the stock market is recommended.

Mutual funds are a source of investment where a company pools money to invest it in securities. The company collects the money from more than one investor collectively. It offers tax benefits to the investors. Money can be invested in a diversified portfolio. It comes with a systematic investment plan.

Comparison Table Between Stocks and Mutual Funds

Parameters of ComparisonStocksMutual Funds
DenominationCan have the same valueThe pool of money is collected from more than one investor.
Numeric valueDefinite numerical valueNet assets value
Original IssuanceAlways a possibilityNo such possibility
Risk levelHigher riskLower risk
Return potentialHigher returnsComparatively less high returns

What are Stocks?

Stocks have proven to be one of the ways of securing investment. It is because of all the following benefits:

  1. Effect of the growing economy: along with the growth in the economy, the earnings in the corporate world also increase. The reason behind this is that the jobs are increased in the economy, which leads to income, and finally sales are also increased. It ultimately results in getting more revenues in the register.
  2. Ahead of inflation: it is also the best way to stay ahead of the inflation rate. It implies the individual has a longer time horizon.
  3. Easy to buy: it is easy to buy stocks of any corporation. The stock market made the process simpler. They can be purchased through a broker or even with an online platform. It is easier to buy them while sitting at home. Any adult can buy stocks by creating an online account. Even nowadays, the commission is not charged for doing the same.
  4. Profitable: some investors buy a share of a start-up when the value is low, and later on, when the corporation succeeds, they sell their shares for a higher price.
  5. Easy to sell: as much as it is easy to but, they are easier to sell too. In the stock market, you can sell your stocks anytime you want.

With all the above benefits or advantages it also has some disadvantages that include, there is a certain risk always involved in the trade of stocks, stockholders are paid at last after making all the payments, there is a very high competition in the market that sometimes leads to increase in price.

What are Mutual Funds?

It is a source of investing money, where one investor gives his money to a company that further collects the money from more sources and together put it in some security. It is being considered more nowadays as an option for investing as it has all the following advantages:

  1. Fund Managers: professional handles the fund collected. They have experience and excellent track records. Also, they are backed by experts with a great knowledge of assets and stocks.
  2. No Lock-in Period: they can be withdrawn at any time. A penalty has to be paid if the withdrawal is premature. Only a few of them are not allowed to withdraw before and come with a lock-in period.
  3. Low cost: it is an ideal option for a beginner or small owner as it does not cost much. Only a few percent of the cost has to be beard by the investor.
  4. Switch Fund Option: under this option, you can move your investment to the different fund of the same fund house. It is important as being a smart investor you should know when to leave or enter a particular fund. You can move your investment anytime if you find another fund with more potential.
  5. Flexibility: most of the other investment options lack a very important factor, i.e., flexibility. And mutual funds are preferred mostly due to their flexibility. You can enter and exist, change the fund anytime as per your convenience, which is not allowed in most of the other investing options.

Main Differences Between Stocks and Mutual Funds

  1. Both the Options differ in terms of numeric value. On the one hand, stocks have a numeric value, but on the other hand, mutual funds do not have a numeric value but it has net assets value.
  2. The possibility of original issuance is always available in the case of stock investment, but no such possibility is available in the case of mutual funds.
  3. When it comes to risk level, stocks have higher risk as you are responsible for making any decision related to the investment, and the value of stocks can increase and decrease anytime, while in the case of mutual funds, the decisions are made by an experienced manager.
  4. Stocks are a suitable option for someone who has knowledge of the market and has some prior experience in investing in stocks, whereas, in mutual funds, professionals are managing the funds; therefore, it is suitable for a beginner with less knowledge and no experience in investment.
  5. They also differ in terms of diversification, which is only possible if the stocks allow it in stock investment, whereas mutual funds have more diversification options in comparison.

Conclusion

Therefore, now there should not be any confusion between both options for the investment. Both of them have their advantages and disadvantages. It mainly depends on the investor and their capabilities which option is better for them. Factors such as income, risk-taking capabilities, financial goals, etc., should be considered before making any decision. Investing is a big decision as if the right choice is not made, a person may suffer a huge loss; otherwise, also money is an important factor for livelihood. There are other options too for investing that are better than bonds and mutual funds. Such options include debentures, public provident funds, bank deposits, etc.

References 

  1. https://direct.mit.edu/rest/article-abstract/86/3/783/57594
  2. https://academic.oup.com/rfs/article-abstract/27/12/3441/1848701
  3. https://academic.oup.com/rfs/article-abstract/30/8/2596/3101297
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