If you're new to investing, the idea of "playing the stock market" might sound pretty cool. While you can spend time and money picking individual stocks with the hope of striking it rich, a less risky alternative is to purchase shares of mutual funds. With mutual funds, money is pooled from a variety of investors and spread over a number of similar stocks. Your risk tolerance and investment knowledge can determine whether stocks or mutual funds are right for you.
If you like to take control of your investment portfolio, you may prefer stocks over mutual funds. With stocks, you get to pick the individual companies that you wish to invest in, either on your own or with the aid of a stock broker. With mutual funds, you send your money to the fund manager who spreads it over a variety of investments. While you select the types of stocks and industries, you won't be investing in one specific company.
Counting Your Eggs
Mutual funds allow you to diversify, reducing the element of risk. Your investment dollars are spread over a number of stocks in the same category. This means that if one or two of the stocks struggle, your losses can be balanced by gains made by other stocks within the fund. When you buy an individual stock, you are placing all of your investment eggs in one basket, and your financial future can hinge on the success or failure of that stock.
With the prevalence of online stock trading, it can be easier to invest in the stock market than it used to be and you don't need as much in the way of start-up dollars. However, according to CNNMoney.com, you still need about $25,000 if you want a balanced portfolio consisting of 15 to 20 stocks. With mutual funds, your investment dollars are instantly diversified, so don't have to spend as much to attain balance. Some funds even allow you to invest as little as $50 or $100 a month via automatic deduction from your bank account.
Stocks may be better if you have a lot of free time on your hands to study the investment market. For most people, however, lots of extra time is not an option. Because the fund manager does all of the heavy lifting for you, you'll be able to use what little spare time you have for other pursuits without having to worry as much about your investments.