Which is a better investment- individual stocks or mutual funds?”- this is a common question asked to financial advisors every day. First, let’s start off by explaining the difference between the two. Individual stocks are essentially buying a “piece” of an individual company whereas mutual funds are shares of many different companies and can also include bonds and securities as well. Essentially, buying a mutual fund is like buying a lot of little shares in each stock in the fund (a portfolio of stocks).

 

Typically speaking, mutual funds are considered “less risky” than buying individual stocks because they are more diversified across industries and companies. Assuming one or two stocks in the mutual funds fail, your mutual fund as a whole can still remain profitable by the other stock investments that may be performing very well. Conversely, stock investing has more risk, since you are relying on the performance of an individual company.

 

 So, which one is better for investing? That answer relies on the individual who is investing and the risk level that they are comfortable with.
 

Investing and trading are two very different methods of attempting to profit in the financial markets. The goal of investing is to gradually build wealth over an extended period of time through the buying and holding of a portfolio of stocks, baskets of stocks, mutual funds, bonds and other investment instruments. Investors often enhance their profits through compounding, or reinvesting any profits and dividends into additional shares of stock. Investments are often held for a period of years, or even decades, taking advantage of perks like interest, dividends and stock splits along the way.

 

Trading, on the other hand, involves the more frequent buying and selling of stock, commodities, currency pairs or other instruments, with the goal of generating returns that outperform buy-and-hold investing. While investors may be content with a 10 to 15% annual return, traders might seek a 10% return each month. Trading profits are generated through buying at a lower price and selling at a higher price within a relatively short period of time. The reverse is also true: trading profits are made by selling at a higher price and buying to cover at a lower price (known as "selling short") to profit in falling markets. Where buy-and-hold investors wait out less profitable positions, traders must make profits (or take losses) within a specified period of time, and often use a protective stop loss order to automatically close out losing positions at a predetermined price level. Traders often employ technical analysis tools, such as moving averages and stochastic oscillators, to find high-probability trading setups.

 

 Traders generally fall into one of four categories:
  •    Position Trader – positions are held from months to years
  •    Swing Trader – positions are held from days to weeks
  •    Day Trader – positions are held throughout the day only with no overnight positions
  •    Scalp Trader – positions are held for seconds to minutes with no overnight positions


 Investing in the stock market is important for people that wish to build a healthy financial future. The main reason for investing in stocks is to make money. There are many ways you can invest but the stock market usually offers the highest returns. Some people keep money in the bank making little to no interest, while safe, when inflation is factored in, these individuals are actually losing money. Assume you make 7% a year in the bank, if that. Then factor in 5% inflation a year. The safe investor is actually earning 1% per year. Investing in the stock market can make returns in excess of 10% a year (Not fixed), though it does carry risk. Anyone looking to invest in the stock market needs to understand that risk.

 

 As the economic picture continues to remain bleak, investing wisely in the stock market is the only way to ensure a successful, unstressed future. Without investing, no couple or individual will be able to retire and live comfortably. While investing carries risk, the key to minimizing that risk is to find a service that can help you avoid investing pitfalls. Learning from the pros is the best way to excel and profit. Make sure to avoid the hype in the media, instead focus on the true pros that invest, swing trade and day trading for a living.