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Stocks and mutual funds both offer ways to construct a portfolio, but there are differences in the way they operate, as well as what you can expect in the long run. A stock represents a share of ownership in a company. When a company, like (TSLA) or (AMZN) does well, those who own shares receive the benefit. As the company grows the business, the stock price usually goes up along with it, giving investors the opportunity to sell shares for more than they bought them for. A mutual fund is a pooled investment that contains shares of many different assets. , often hundreds. When you buy shares of a mutual fund, you receive a slice of everything included. Additionally, there are index mutual funds that track popular indexes, . Other funds might be actively managed, where a professional chooses what’s included in the mutual fund based on different goals like growth or income. The pros and cons of stocks
offer a potentially valuable way to grow your wealth and take advantage of , but they also come with some drawbacks. Pros
Easy to trade — Individual stocks are easy to trade on an exchange, and there are a that make the process intuitive. Potential for large gains — Depending on stock performance, you could see large gains. This could lead to more wealth down the road. Low trading costs — In many cases, stocks come with low trading costs. In fact, for individual stocks. Cons
Potential for large losses — While there is the potential for large gains, you could also end up with large losses if the stock price drops and doesn’t recover. Research takes time — It can be time consuming to research stocks and choose the assets that work best for your portfolio. Stress — Investing in stocks can feel like an emotional rollercoaster and the stress can make it hard to sleep at night. The pros and cons of mutual funds
can provide some stability in your portfolio, but they aren’t foolproof. Here’s what you should know. Pros
Can be low cost — Many mutual funds, especially passively-managed index funds, can be low cost, meaning they don’t charge a large . Additionally, some brokerages offer their own funds without trading fees. Instant diversification — Because you’re investing in a basket of assets, you have instant diversification, and therefore lower risk, and don’t need to buy multiple individual stocks to . Can be less stressful — In some cases, can be less stressful than investing in stocks. If you’re using an index fund, especially, you’re likely to keep pace with the market as a whole. Cons
Some funds have sales “loads” — There are when you buy or sell shares. These sales loads can cost you before you even start investing. Can be high cost – Some funds charge a high expense ratio, often above 1 percent of your investment in the fund annually, but lower-cost funds are available. May not be tax-efficient — If the mutual fund has sold assets and seen a gain, you might see distributions that create a taxable gain. So even if you haven’t sold your mutual fund shares, you could still be subject to capital gains taxes. Could underperform the market — If you have an , it might not perform as well as the market, and you could even lose money. Which is a better investment
Whether stocks or mutual funds are better for your portfolio depends on your goals and risk tolerance. For many investors, it can make sense to use mutual funds for a , where diversification and reduced risk might be more important. For those hoping to capture value and potential growth, individual stocks offer a way to boost returns, as long as they can emotionally handle the ups and downs. For beginners who have a small amount to invest: Starting with and making regular contributions can be an effective way to build a portfolio. Later, after becoming more experienced, consider branching out into individual stocks. Carefully consider your goals and use investments to create a strategy designed to help you get there. If investing in the stock market feels too risky for you, consider these for your portfolio. Bottom line
Stocks represent shares in individual companies while mutual funds can include hundreds — or even thousands — of stocks, bonds or other assets. You don’t have to choose one or the other, though. Mutual funds and stocks can both be used in a portfolio to help you grow your wealth and . Carefully consider how each might fit your needs and personal investing style. You might also consider investing in exchange-traded funds, or ETFs. When comparing , you’ll notice some similarities, but there are differences too. Be sure to do your research before investing. Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation. SHARE: Miranda Marquit is a contributing writer for Bankrate. Miranda writes about topics related to investing, saving and homebuying. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Kenneth Chavis IV is a senior wealth manager who provides comprehensive financial planning, investment management and tax planning services to business owners, equity compensated executives, engineers, medical doctors and entertainers.