Stock vs Mutual Funds

Updated on April 4, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

Differences Between Stock and Mutual Funds

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

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

stock vs mutual funds

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Stock vs Mutual Funds Infographics

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Stocks vs Mutual Funds Video Explanation

 

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 financial market wherein short-term assets and open-ended funds are traded between institutions and traders.read more instruments.
  2. The stock performance depends on the company’s overall performance in which the investment is made and the sector. Various macroeconomic factors can have a direct impact. Mutual funds’ performance depends on macroeconomic factorsThe Macroeconomic FactorsMacroeconomic factors are those that have a broad impact on the national economy, such as population, income, unemployment, investments, savings, and the rate of inflation, and are monitored by highly professional teams governed by the government or other economists.read more, but the skills of the fund managers and the pool of securities can help maintain stable and regular returns.
  3. The board of directors determines the strategies of stocks. It can change according to the prevailing conditions and the directors’ skills. In contrast, the rules and regulations in Mutual funds have been stated as per the Red Herring ProspectusRed Herring ProspectusThe term "Red Herring prospectus" refers to the preliminary prospectus that a company files with the SEC in relation with its initial public offering. It contains information about the company's operations but does not include details about the prices at which securities are issued or their numbers.read more. It is essential to follow the rules as per the Prospectus since the aim is to beat the returns the market offers without impacting the principal amount invested.
  4. Stocks represent an ownership stake to the investors, whereas mutual funds offer fractional ownership of the overall basket of securities.
  5. The investor is individually responsible for the management and administration of the stock, which 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 investment direction 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 current 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. Mutual funds aim to offer regular dividendsDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more to the investors and more than that offered in the market. They also provide a timely statement on the performance of the general fund, which helps investors in decision-making. Stocks get regular returns in the form of dividends earned and can vary depending on the firm’s performance and decisions taken by the management.
  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. In contrast, the fund manager is not directly responsible for the results. However, their increment and commission depends on the funds they manage.

Comparative Table

Basis for ComparisonStocksMutual Funds
MeaningBunch of shares held by an investor indicating ownership in a CorporationThe fund is operated by an AMC (Asset Management CompanyAsset Management CompanyAn Asset Management Company (AMC) refers to a fund house, which pools money from various sources and invests the same in purchasing capital on behalf of their investors.read more) pooling 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 times.

Conclusion

Whether investing in stocks or Mutual funds is a completely personal decision, one should understand the pros and cons of each avenue. Both of these options are suitable for small-scale investors with limited investments. Though stocks provide the opportunity to invest in the stock market directly, 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 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 duration aspect also has to be considered since both stocks, and mutual funds can be held for the short, medium, or long-term.

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