If you are in search of investment opportunities that can better your personal finances, the two best options you have are stock trading and mutual funds. So which of the two options offers better rewards?
Stock trading gives you a share in the assets, profits, and losses of a company. On the other hand, a mutual fund is a portfolio of investments that offers more diversification. It involves bringing together small savings from different investors and investing the funds in bonds, stocks, or a range of securities. In short, investors bundle many company stocks in a single investment. Let’s dive deeper and analyze the fundamental differences between these avenues of investment.
Risk and Returns
Image via Flickr by Ken Teegardin
To enjoy higher returns within the least time possible, it is better to invest in cap stocks. This will give you the thrill of enjoying a big payday and possibly doubling or tripling your investment within a year. Just choose the right stocks and sell them when the best opportunity presents itself. On the downside, stocks tag along with higher risk when compared to mutual funds.
The prime benefit of investing in mutual funds is that investors face lesser risks of losing all or a significant fraction of their investment. Thanks to a diversified portfolio, you will still enjoy some rewards even if one of the companies or even an entire sector fails. With mutual funds, you face the disadvantage of having to bear with a longer growth trajectory. You have to wait for 5-7 years for your investment to generate substantial returns.
Fees and Expenses
Professional fund managers manage mutual funds. You have to pay a fee or the expense ratio because these experts will be in complete control of your investment. Unfortunately, paying the fee is mandatory, yet you are not assured of an outsized performance from the managers. On the other hand, stocks are managed by investors. You can decide whether or not it is necessary to hire a stockbroker.
With stocks, you have more control over your investment. You can choose the stocks to invest in, how much to invest, and even when to sell your shares. The fate of your investment is squarely in your hands, so do your research to find reliable stocks and know when to sell or exit. This gives you some level of control over the profits or losses you make.
You can study different stock markets well and invest in the stocks that you think are valuable, all on your own. Different market indexes, like the ATX Index for the Austrian Market, or Nasdaq Composite for the US Market, can be monitored to gauge market movements and decide on investments.
With mutual funds, the fund manager decides everything. Most investors take a passive role and allow the professionals to do all the heavy lifting. You cannot exit any stocks in your portfolio, and you also have no say over which shares to buy.
Two vital factors can help you decide whether to invest in stocks or mutual funds. First, determine your risk tolerance versus the kind of returns you desire. You should also choose how much time you are ready to dedicate to managing your investment.
Ensure that it pays off. Stock trading is not for the faint-hearted. It is for those willing to do their research with the hopes of enjoying the thrill of making insane profits overnight.