Stock vs Mutual Funds

Differences Between Stock and Mutual Funds

The key difference between Stock and Mutual Funds is that Stock is the term which is used to represent the shares held by the person in one or more than one companies in the market indicating the ownership of a person in those companies, whereas, the mutual funds is the concept where the asset management company pools the funds from the different investors and invests it in the portfolio of different assets with the investors having the shares of the fund for their invested money.

This topic is focusing on churning money in a short period. Investors can use these avenues for a quick return on investments or hold it for an extended period.

stock vs mutual funds

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Stock vs Mutual Funds Infographics

STOCK-VS-MUTUAL-FUNDS

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Key Differences

  1. A stock is a collection of shares owned by an individual investor indicating their proportion of ownership in the assets and earnings of a corporation. On the other hand, mutual funds are a pool of money from several small-scale investors, further invested in a portfolio of assets. These include equity, debt, or other money marketMoney MarketThe money market is a market where institutions and traders trade short-term and open-ended funds. It enables borrowers to readily meet finance requirements through any financial asset that can be readily converted into money, providing an organization with a high level of liquidity and transferability.read more instruments.
  2. The performance of stock depends on the company’s overall performance in which the investment is made and sector. Various macroeconomic factors can have a direct impact. Mutual funds’ performance depends on the macroeconomic factors, but the skills of the fund managers and the pool of securities can help in maintaining stable and regular returns.
  3. The board of directors determines the strategies of stocks. It can change according to the prevailing conditions and the skills of the directors. In contrast, in Mutual funds, the rules and regulations have been stated as per the Red Herring Prospectus. It is essential to follow the rules as per the Prospectus since the aim is to beat the returns offered by the market without having any impact on the principal amount invested.
  4. Stocks represent ownership stake to the investors, whereas mutual funds offer fractional ownership to the overall basket of securities.
  5. The investor is individually responsible for the management and administration of the stock or can be done by appointing a stockbroker. Conversely, mutual funds are managed by a professional fund manager on behalf of the investors.
  6. The risk component in the case of stocks is larger as the direction of investment is in a single company. In contrast, Mutual funds offer the benefit of diversification, thereby offering robust earning opportunities in case of failure in a single company or sector.
  7. The trading of stocks can take place at any time during the day, including intra-day trading at the existing price, whereas mutual funds are traded only once a day, probably at the end of the daily basis in which the NAV is finalized.
  8. The individual share price of the stock is multiplied by the number of shares determining the value of stock held by the investor. On the other hand, the value of the mutual funds can be calculated by arriving at the NAV, which is the total value of assets net of expenses.
  9. Stocks get regular returns in the form of dividendDividendDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.read more earned and can vary depending on the performance of the firm and decisions taken by the management. Mutual funds aim to offer regular dividends to the investors and more than that offered in the market. They also provide a timely statement on the performance of the overall fund, which helps investors in decision making.
  10. The stockholderStockholderA stockholder is a person, company, or institution who owns one or more shares of a company. They are the company's owners, but their liability is limited to the value of their shares.read more is directly responsible for the returns in the stock market as the investor is directly managing the same, whereas the fund manager is not directly responsible for the results. However, their personal increment and commission do depend on the funds they are managing.

Comparative Table

Basis for ComparisonStocksMutual Funds
MeaningBunch of shares held by an investor indicating ownership in a CorporationThe fund operated by an AMC (Asset Management CompanyAsset Management Companyset Management Company is a company that takes the financial assets of a person, company or another asset management company (generally this will be high net worth individuals) and use the assets to invest in companies that use those as a operational investment, financial investment or any other investment in order to grow the investment.read more) pooling in funds from investors and investing in a portfolio of assets.
OwnershipShares of a CompanyShares of a Fund
Final InvestmentDirectly in the stock marketIn the fund through which investment is directed.
ManagementInvestorFund Manager
RiskHighRelatively low due to professional management
Value DeterminationPrice of share on the exchangeNAV (Net Asset Value)
TradingThroughout the day at the prevailing priceOnly once generally at the end of the day
CommissionPaid when a stock is tradedThese can be in the form of load or no-load. The commission can be paid either at entry or exit or both the times.

Conclusion

Whether investing in stocks or Mutual fund is a completely personal decision, one should understand the pros and cons associated with each of the avenues. Both of these options are suitable for small-scale investors with limited investments. Though stocks provide the opportunity of directly investing in the stock market, one needs to keep a regular track of the performance to decide the future course of action. The investor completely bears the risk and rewards.

On the other hand, mutual funds provide the cushion of diversification in the basket. It is helpful as the risk gets spread out, and in case one sector is going through a difficult phase. Besides, these funds are managed by professionals within the ambit of strategies committed. Hence the investors can be relieved of constant monitoring of the investment.

Thus, depending on the risk-taking ability and term of investment, investors shall consider either or both of the opportunities. The aspect of duration also has to be considered since both stocks and mutual funds can be held for short, medium, or long-term.

Stock vs. Mutual Funds Video

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