Stocks vs. mutual funds

Summary

Stocks represent ownership in a single company, while mutual funds are a collection of investments owned by a group of investors in a single fund.
Stocks can be traded throughout the day, while mutual funds can only be bought and sold once at the end of the day.
Mutual funds offer hands-off investing with easy diversification, while stocks require more work to understand and provide no instant diversification.
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What are stocks?

Stocks are an investment type that represents ownership in a publicly traded company.

As an investment, stocks tend to increase in value if the company does well or exceeds expectations. If the company doesn’t meet expectations, you could see the share price decrease, and your investment will lose value.

Advantages of stocks

Higher returns: Individual stocks offer a high potential for growth, and you may see great returns. You do take on market risk, however.
Greater degree of involvement: You can invest the way you want when investing in individual stocks. You do the research, choose companies you have an interest in, and make trades yourself.
No management fees: Mutual funds charge management fees, but if you’re investing in stocks yourself, you won’t see those.
Highly liquid: It’s easy to trade stocks almost anytime you want.
Dividend Stocks: You can earn dividends by investing in dividend stocks.
More control over tax efficiency strategies: When you own individual stocks, you can buy and sell to make your taxes more efficient.

Disadvantages of stocks

Diversification issues: Stock ownership doesn’t offer instant diversification. To create a diverse portfolio, it’ll take more work to buy different shares of various companies than if you invest in mutual funds.
More work: Investing in individual securities requires active trading. Even with buy-and-hold strategies, you need to make trades yourself and take time to understand your investments.
Taxes: If you’re unaware of how trading stocks will affect your taxes, you could end up with a large bill on tax day.
Market risk: Your principal investment is always at risk when investing in companies' shares.

What are mutual funds?

When you invest in a mutual fund, you pool money with other investors to purchase a wide variety of investments that a professional portfolio manager manages.

Your money grows when the fund’s investments are successful. However, you do not directly own the investments; rather, you own a share in the fund.

Advantages

Professional management: Mutual funds are professionally managed.
Diversified portfolio: Mutual funds offer an easy way to access a diversified portfolio.
Different types of mutual funds: There are mutual funds for all kinds of investing strategies.
Easy to trade: Mutual funds are very liquid, transparent, offer low minimum investments, and are generally easy to invest in.

Disadvantages

Fees: Mutual funds can be costly, and you’ll pay a number of fees, both directly and indirectly.
Taxable events: Active management of mutual funds means you’ll see taxable events, such as the sale of a stock, for which you’ll likely have a tax bill.
Less frequent trading: Mutual funds trade only once per day, whereas stocks can be traded at any time of day.
Returns aren’t guaranteed: Mutual funds don’t always outperform the market, even with professional management. High-fee mutual funds will impact your returns over time.

Are mutual funds stocks?

Mutual funds are not stocks. However, the underlying investments of mutual funds are often comprised of stocks. Mutual funds can own many different types of investments beyond stocks.

Another important distinction is in the type of ownership. When you invest in mutual funds, you own a share in a portfolio, whereas when you invest in stocks, you own a piece of the stock directly.

What is the difference between stocks and mutual funds?

Here is a breakdown of some of the key differences between stocks and mutual funds:

	Stocks	Mutual funds
Ownership	Own a share of a publicly-traded company.	Own a part of the mutual fund.
Diversification	Ownership in a single company.	Ownership in a wide variety of investments.
Management	Self-managed.	Managed by a professional.
Risk	Higher risk when not diversified.	Lower risk with a diversified investment pool.
Fees	May pay trading commissions, though some online brokerages offer free trades.	Expect to pay fund operating expenses and shareholder fees, including sales loads, redemption fees, exchange fees, account fees, purchase fees, management fees, distribution fees, and more.
Trading	Easy to trade; highly liquid, but must complete trades yourself.	Easy to trade, but transactions are limited to once per day, and there may be a higher minimum investment requirement. Investment decisions within the mutual fund are made at the discretion of the fund manager.

Ownership

With stocks, you own a small part of the company you’re investing in. You have voting rights as well.

With mutual funds, you own shares in the fund and not the individual investments. You earn money when the fund performs well.

Diversification

Stocks don’t offer instant diversification like mutual funds do. Because mutual funds have a wide variety of underlying investments, they offer an easy way to diversify your portfolio without a lot of effort on your part.

Management

With stocks, you need to research and make trades yourself in your investment plan. Mutual funds are professionally managed, and you won’t need to be actively involved in the process.

Risk

Stocks are a riskier investment than mutual funds because there are no other investments to balance out your portfolio if one isn’t doing well. Mutual funds tend to be less risky due to their diversification.

Fees

You’ll pay far fewer fees when you trade stocks than when you own shares in a mutual fund. Mutual funds have a number of fees and costs that can add up. Some examples include sales load fees, redemption fees, exchange fees, account fees, purchase fees, management fees, distributions fees, and more.

Fees aren’t the same for every mutual fund, so it’s helpful to look closely at the shareholder fees listed on the fund’s disclosures. Some have lower fees, while others are egregious.

Trading

Both stocks and mutual funds are easy to trade; however, mutual funds can be traded only once per day and may have a higher minimum investment.