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.
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.
