Before investing, it is important to have a good idea about the type of investment you're willing to pursue. Nowadays, there are several investment options to choose from. Depending on your budget, objectives and preference, you can choose between Stocks and Mutual Funds. However, a lot of investors especially beginners fail to differentiate between Funds and Stocks. Knowing where to invest your money between the two in order to get the best returns can be a challenge.
Both stocks and mutual funds have their own advantages and disadvantages and therefore, it is hard to determine which of the two investment options is ideal. So, how do you determine the best investment choice? The personal circumstances under which you intend to invest is the best strategy to use to choose between stocks and funds. To be in a better position to understand which option will work for you best, you need to know the difference between the two.
Stocks refer to company shares which investors can either sell or buy using the stock market. Stocks are known to be a good investment channel but are high risk and therefore, investors should be well-informed before venturing into stocks. Furthermore, stock market prices are always affected by prevailing market conditions. On the other hand, the process of investing in mutual funds is somewhat different. In this case, fund managers are responsible for collecting money from several investors and channeling the collected money into various investment ventures such as bonds, stocks or other assets. It is the role of the fund manager to use their expertise to research and find the best form of investment.
In the case of stocks, once you purchase stocks, you automatically become a shareholder in the company you have invested in. For mutual funds, you hand over your money to a fund manager who uses their expertise and market knowledge to choose an investment they think will grow faster and bring the highest returns.
The 3 main factors that can be used to determine whether you should choose to invest in mutual funds or stocks are; Expenses, Returns and Risks.
Risks: If you are concerned about risks jeopardizing your investment, going for mutual funds is a wise decision. This is because mutual funds allow you to diversify your investment by putting your money in different projects and assets. Mutual funds are considered an excellent choice for beginners because good performing investments cover up for underperforming projects. Stocks are considered to be extremely risk because they limit you to investing in a single company especially if you're on a tight budget and cannot diversify.
Returns: Stocks that suffer from fewer risks have a better potential of generating good income than mutual funds. When fund managers invest collective investor money in some projects, profit margins are substantially lowered making it challenging to achieve good returns. In the case of stocks, investing in the right company and at the right time yields good profits.
Expenses: When it comes to investment expenses, stocks are the preferred option because they are cheaper to maintain. Mutual funds are associated with costs such as Implicit, Explicit and hidden costs.
Based on the above factors and understanding the difference between the two, you should be in a position to make a wise choice.