Mutual Funds What You Must Know
An analogy would be ordering desserts with a group of your friends. If everyone orders a different dessert and shares, then everyone can have a taste of many different things.
Likewise, a mutual fund allows an individual to own shares of many different companies' stocks without such heavy investment.
Mutual funds are attractive to beginning investors because they are relatively easy to understand. They are managed by a professional, so they don't require as much research by the individual investor. It offers a chance to "play the market" without taking the risks that would come with owning stock in individual companies. For example, if a person owned stock in one company that suddenly dropped, that person would be out a lot of money. But if it was part of a mutual fund, then the loss might be balanced out by other stocks in the fund that made gains.
Another attractive thing about mutual funds is that they often fall under several categories. For example, a person who wanted to invest in the technology sector could find a mutual fund that buys stocks from only technology companies. Other popular categories include environmentally friendly companies, pharmaceutical companies, and biotechnology companies.
The most popular mutual fund is probably the S&P 500, which is a group of 500 companies which tends to follow the same trend as the stock market as a whole.
Even though mutual funds present an easier way to invest than investing in individual stocks, an investor should still periodically check their mutual fund to make sure that it is performing the way that they like it to. Many people make the mistake of not reviewing their mutual funds only to find out too late that they have been losing money. Also, which investing in a mutual fund does present a way to diversify your investments, you should also diversify the mutual funds that you are investing in for greater diversification.
An analogy would be ordering desserts with a group of your friends. If everyone orders a different dessert and shares, then everyone can have a taste of many different things.
Likewise, a mutual fund allows an individual to own shares of many different companies' stocks without such heavy investment.
Mutual funds are attractive to beginning investors because they are relatively easy to understand. They are managed by a professional, so they don't require as much research by the individual investor. It offers a chance to "play the market" without taking the risks that would come with owning stock in individual companies. For example, if a person owned stock in one company that suddenly dropped, that person would be out a lot of money. But if it was part of a mutual fund, then the loss might be balanced out by other stocks in the fund that made gains.
Another attractive thing about mutual funds is that they often fall under several categories. For example, a person who wanted to invest in the technology sector could find a mutual fund that buys stocks from only technology companies. Other popular categories include environmentally friendly companies, pharmaceutical companies, and biotechnology companies.
The most popular mutual fund is probably the S&P 500, which is a group of 500 companies which tends to follow the same trend as the stock market as a whole.
Even though mutual funds present an easier way to invest than investing in individual stocks, an investor should still periodically check their mutual fund to make sure that it is performing the way that they like it to. Many people make the mistake of not reviewing their mutual funds only to find out too late that they have been losing money. Also, which investing in a mutual fund does present a way to diversify your investments, you should also diversify the mutual funds that you are investing in for greater diversification.
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