Stocks vs Mutual Funds vs ETFs
A stock belongs to a company that sells a product or a service and earns a profit. Hence, when you buy a stock, if the company is performing well, the stock price will likely increase and you make a gain. But if the company is suffering from losses, then you lose money as well. But a mutual fund is different, since a mutual fund company doesn’t sell a product or service like a stock company, but it s sole purpose is to invest in various assets and get a return when the asset prices change. So, when you buy a mutual fund share, you are buying a small percentage of the mutual fund company and all of its assets. And as the price of the mutual fund share rises or falls, you get a return.
A major difference between a stock and a mutual fund is that, the stock price depends on the performance of a company and its product sales, while a mutual fund price is only dependent on its assets current value. Example: it AAPL takes some losses in its newest iPhone release, then the AAPL stock prices will likely suffer and those who own a large number of AAPL stocks will get losses. However, in mutual funds, this risk is decreased by “diversifying” the investment portofolio. The fund is used to buy assets of many different types, e.g. stocks of different companies, bonds, currency. So, suppose if a mutual fund is made up by purchasing stocks of 50 different companies, and AAPL is a small percentage of the fund, then when AAPL prices fall, the mutual fund share price doesn’t get affected too much, since AAPL is only one of the various different stocks, and not all stocks are falling in prices.
To be correct, the price of a share of a mutual fund is called NAVPS (Net Asset Value Per Share) and this price is the average price of all the different assets in that specific mutual fund.
However, one downside of mutual fund shares is that they are not as easy to exchange as stocks, and their prices do not change from market start to end like a normal stock, instead their price is calculated at the end of the day at market closing time. Hence, you can’t trade then all day and get a return like with stock price fluctuations.
However, this is exactly what an ETF (exchange traded fund) does as compared to a mutual fund. Unlike a mutual fund, an ETF share is tradable at an exchange just like a stock, and the price of an ETF also varies throughout market hours, just like a stock, but unlike a stock, an ETF is still like a mutual fund, since it consists of many different assets, e.g. the portfolio of the ETF consists of 50 different stocks. And so, compared to stocks ETFs offer less risk and compared to mututal funds, ETFs allow tradability throughout market hours.
There are also various other details not discussed in this article, like whether mutual funds offer dividends, or whether there are voting rights in MFs, or how ETFs are probably passively managed as compared to actively managed MFs.
A last note on hedge funds: A hedge fund is essentially an investment fund which trades according to a investment strategy, as opposed to a more traditional investment fund which trades the securities of the portfolio according to market conditions. Note that a hedge fund is not a company. The laws and regulations that apply to companies (and to other kinds of businesses, such as banks and brokerages) do not apply to hedge funds.
