Stocks and mutual funds are different types of investment options, though they do share some similarities. Stock is a portion of ownership in a publicly traded company. An investor can buy "shares" of that company at a price determined on the open market by sellers and buyers. A mutual fund is a pool of money from a large number of people. Mutual funds invest in a variety of assets, including stock, bonds and short-term cash investments.
When a company wishes to raise money for business projects, it can sell stock. Shares are issued at a set price and bought by investors. Those investors can then sell shares to other investors, with the price being determined by interest in the company, its profitability and expectations of future results. The first sale of shares is called an initial public offering, or IPO. Companies will usually sell more shares over time, as the business grows or new projects require additional funding.
Mutual funds are a very diverse group of investment options. Funds are run by trained investment advisers and offered by investment brokerages. Each firm determines what goal a fund should have. The type of investments a fund pursues determine what level of risk it undertakes and what level of returns it sees.
Target-Date Mutual Funds
One popular and relatively simple mutual fund option when investing for retirement is a target-date fund. These funds are offered by most large investment companies. The fund is designed to mature alongside its investors, becoming more conservative as they grow closer to retirement.
The Vanguard Target Retirement 2030 fund, for example, is designed for people who plan to work until roughly 2028 to 2032. Currently more than 81 percent of the fund is invested in stocks, with nearly 19 percent invested in bonds. As time elapses the fund will hold more bonds and fewer stocks, since bonds are considered a safer investment less prone to large price swings (meaning the potential for both large gains and large losses is lower).
Some mutual funds do not own any stock. These funds typically purchase certain types of bonds, or debt issued by companies or governments. A municipal bond fund, for example, will buy bonds issued by cities, water boards and other local government entities. Corporate bond funds will buy debt sold by companies, often choosing to focus on certain types of debt (long-term or short-term, safe or high-risk). In a bond fund, investors earn money from the interest payments made by the company or government that issued the bond.
Stocks and mutual funds carry risk. Investments can decline in value and even become worthless in the event of a corporate bankruptcy. There is no guarantee you will make money on these investments. Conduct thorough research before investing and consult with an investment professional to determine what type of investment is right for you.