A stock is a share or part of the ownership of a corporation whose price rises or falls according to what investors establish by trading shares on an exchange. A mutual fund is a collective enterprise that buys shares in many stocks, so its worth does not depend on a single company. A mutual fund does not have a "price" -- it has a value, derived from calculating the worth of all its stocks. Mutual funds are safer investments because they do not depend on one company. They are especially good for younger investors new to dealing with securities.
Shared Risk Ventures
Mutual funds are set up by investment firms as "shared risk" ventures, in which many investors pool their money to buy stocks, bonds or other securities. Some funds are tailored to specific types of investments, such as corporate bonds, or industries, such as aviation. Fund managers, with advisers, actually buy and sell stocks or bonds on trading exchanges on behalf of the fund.
Net Asset Value
Each fund figures its worth or net asset value at the end of each trading day and reports it to its investors and the public. The net asset value is the worth of all the stocks the fund owns, minus its liabilities divided by the number of shares outstanding in the fund. The value will vary daily, as prices of its stock holdings and the number of shareholders change. If a fund's net assets are $90 million and it has nine million shares, its NAV is $10.
Buy at NAV
You buy a mutual fund share at its last net asset value. If that fund's NAV is $10 when you ask your broker to buy it for you, you pay $10 (plus any broker commissions or fees). If that fund's assets rise because the stocks increase in price, the value may jump to $11 or $12. Mutual fund values change more slowly than individual stocks because they reflect broader economic conditions and are not influenced by a single action, like a big company earnings drop.
A fund's NAV will change as it distributes proceeds to its shareholders from capital gains, such as dividends on stocks which it holds. Most funds are open, so the number of shareholders and investments will vary daily. A few funds are "closed end," in which investment options are limited and shares typically trade on an exchange, just like a stock.
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Bob Haring has been a news writer and editor for more than 50 years, mostly with the Associated Press and then as executive editor of the Tulsa, Okla. "World." Since retiring he has written freelance stories and a weekly computer security column. Haring holds a Bachelor of Journalism from the University of Missouri.