Securities are investment instruments. They represent ownership or a debt agreement. Securities include: stocks, bonds, options, futures, and mutual funds. Investment securities are purchased by investors in hopes of earning money. Depending on the security, they may either sell it for a capital gain or loss, or they will collect interest on it such as with bonds. Some derivatives also have more complicated ways of earning money, but we will stay simple.
A Mutual Fund is a Collection of Other Securities
A mutual fund is not quite the same as other securities such as stocks and bonds. It is made up of other securities. A mutual fund has a fund manager who buys and sells stocks and bonds to include in the mutual fund.
Hundreds even thousands of investors who decide they want to own part of the fund will purchase shares of the mutual fund and all their money is pooled together. The fund manager uses the money to buy a wide variety of securities and passes the ownership onto the investor.
Perfect for the Average Person
If you don’t know what a mutual fund is, chances are you aren’t very well versed in investments. If you don’t fully understand stocks and bonds, you might not know how to choose successful ones. With mutual funds, the fund manager picks the stocks, so you don’t have to worry about spending any time researching stocks.
This doesn’t mean that you will automatically earn a high return because an expert is running your portfolio. The stock market is always risky. What this does mean is that you get a well diversified portfolio without having to purchase many stocks that you choose.
Perfect for the Not-so-Wealthy Yet
For many people, buying 100 shares of stock at a time is just not possible. Even if they were able to afford the stock, they would only own stock of one company which is not diversified. Diversifying reduces risk of your portfolio, protecting your investments.
For example, if you bought 100 shares of Google and Google suddenly tanked, you would lose all of your money. On the other hand, if you owned 10 shares of Google and 90 shares of 9 other stocks and Google tanked, you would lose the value of those 10 shares, but hopefully most of the other stocks’ values went up offsetting the Google loss.
If you can only afford to invest $1,000, a mutual fund is perfect for you because you can invest in stocks and maintain a diversified portfolio.
Fund Managers know More than You
It’s impossible to know exactly what is going to happen in the stock market, even if you are a professional. Still, a mutual fund manager knows a lot more than you about stocks and investing and is likely to, at least, be able to maintain a comfortable return on your investment. Hopefully, you will be more assured by your investments when someone who has experience in the market is managing your portfolio.
