What Is The Difference Between Shares And Mutual Funds?


3 Answers

G. Sol Profile
G. Sol answered
The answer above was very good and detailed but may be a bit difficult for a beginner. Here is a similar answer, but more simply explained:

If you buy a share, you are a co-owner of a company. You have a small part of it. If the company gets more valuable, your share will usually get more valuable. If the company makes profits, like any owner, you should get share of that profit, called a dividend. But as a beginner, how do you know what is the best company to buy shares of? Most of the shares I have bought have not done very well :(

Mutual funds are a collection of shares and other investments which are made by a professional investor. The investor buys hundreds of shares and other investments. You can participate and own a fraction of those investments. If the funds investments do well, you do well. The investor gets paid from fees, usually about 0.5 - 2% of the money invested.

So, the advantage of the mutual fund is:

* You are not buying 1 or 2 shares, your fund has hundreds or even thousands of investments. Since the investments are diversified, you stand a much better chance of seeing your money grow. If you invest in a few shares and you didn't pick well, you can lose a lot of money.

* You have a professional investor working for you, very inexpensively. You don't have to worry about which is the best company to invest in, when to buy or sell, etc. All of that is done by the investor for you.

* You can see how well the fund has performed over the past 10 years and compare that to other funds. Of course how it performed is no guarantee about how it will perform in the future. But it does help to make a selection.

How do you get started? Open an account with a broker like Fidelity or Schwab, so you can choose from hundreds or thousands of funds, managed by funds from around the world.

In the first year, put a little money into the account and divide it between 5-10 funds. Look for funds with no loads (no upfront sales fee) and low expense fees (around 1% per year is fine). The advisor should help you to pick good funds for you. Watch your funds develop over 1 or 2 years and get rid of funds that are not performing well. In time, you will learn which are the best funds for you.
Rajesh Shri Profile
Rajesh Shri answered
A share is a unit of ownership of a company that is issued by the company to raise finance to enable it to extend its scope or fund other growth related initiatives. A shareholder is a part owner of the company who can influence decisions related to new business ventures and the like and also receives a share of the profits generated known as dividends.

Mutual funds on the other hand are investment opportunities offered by a finance institution which may be in the form of shares, bonds and other forms of securities that are then reinvested in other ventures with the institution taking care of the entire transactions.

The essential difference between the two is that a share has the advantage of the holder discerning market trends with respect to the specific company while in a mutual fund the investor often cannot determine the exact channels of return on investment which is the domain of the portfolio manager in charge of the mutual fund.

However unlike shares where often the individual has to handle the entire financial element which may not be his domain in a mutual fund one's money is taken care of professionally.

Also since mutual funds typically invest in different sections of the economy the risk factor in case the investment fails, is spread out as compared to shares; also mutual funds are easier to liquidate than shares owing to the nature of investment.

Mutual funds with respect to their working are a better option as compared to investing in stocks, being affordable as also all inclusive in nature. However both shares as well as mutual funds require the holder to pay charges like transaction fees in case of shares and annual fees in case of a mutual fund as well as the payment of taxes by the beneficiary.

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