If you’re new to investing, you might wonder whether stocks or mutual funds are the best investments for beginners.
What is a stock?
A stock is a share of ownership in a company. When you buy a stock, you become a part-owner of that company.
What is a mutual fund?
A mutual fund is a basket of stocks, bonds, or other securities. When you invest in a mutual fund, you are buying a small piece of many different companies.
Key Differences
Here are the key differences between stocks and mutual funds:
| Feature | Stocks | Mutual Funds |
|---|---|---|
| Investment type | Ownership in a single company | Basket of stocks, bonds, or other securities |
| Investing style | Active or passive | Passive |
| Who makes decisions | Investor | Professional fund manager |
| Costs | Commissions when you buy and sell; no ongoing fees after purchase | Annual expense ratios; may have sales loads, redemption fees, and transaction fees |
| Diversification | Only as part of a well-diversified portfolio | Built-in diversification in a single investment |
| Risk | Higher; performance is tied to a single company | Lower; risk mitigated through diversification |
| Customization | High; you choose the stocks you want | Low; a fund manager chooses the investments |
| How it trades | During regular market hours | Once per day |
| Beginner friendliness | Low; you do your own research and analysis | High; a fund manager does the research and analysis |
| Taxes | You control capital gains by timing when you sell | You can owe capital gains taxes even if you don’t sell your shares |
Pros and Cons of Mutual Funds
Pros:
- Built-in diversification
- Professional management
- Attractive returns
- Low costs
- Dividend reinvestment
Cons:
- High expense ratios
- Sales loads
- High investment minimums
- Taxable events
- Trades once per day
Pros and Cons of Stocks
Pros:
- Large potential gains
- Dividends
- Easy to trade
- Low costs
- Tax-efficient
Cons:
- Large potential losses
- Low diversification
- Higher risk
- Time-consuming
- Stressful
Which is Right for You?
The decision of whether to invest in stocks or mutual funds depends on your personal investment goals and risk tolerance.
If you want an easy way to diversify your holdings and don’t have the time, interest, or expertise to research companies, pick individual stocks, and manage your portfolio, then mutual funds may be a good option for you.
If you have a higher risk tolerance and want control over your trading decisions, then stocks may be a better choice.
Of course, you don’t have to choose between stocks and mutual funds. Both can be part of a well-diversified investment portfolio.
FAQs
Are mutual funds safe?
All investments carry some degree of risk, but mutual funds are generally considered safer than stocks because they are inherently diversified.
Do mutual funds outperform the stock market?
While mutual funds can outperform the market occasionally, it isn’t easy to achieve over the long run. Most actively managed mutual funds underperform their benchmark index over the long run.
Should I move my stocks to a mutual fund?
You might consider moving money invested in stocks to a mutual fund if you want the convenience and built-in diversification that a mutual fund offers or someone else to make the investment decisions. On the other hand, you might opt for stocks if you’re comfortable with more risk in exchange for higher potential returns.
Which is better for beginners: stocks or mutual funds?
Mutual funds are generally considered a better investment for beginners than stocks because they are more diversified and easier to manage.