Home

Blog

About

Contact

For Beginners

The Beginners Guide to Investing
What Are Mutual Funds?
The Definition of Mutual Funds
The Mutual Fund Basics

Mutual Fund Investing

How Do Mutual Funds Work?
Mutual Fund Investing For Dummies ... And Everyone Else
How To Compare Mutual Funds

Research and Analysis

Rating Mutual Funds
Mutual Fund Research
The Various Types of Mutual Funds

Bond Funds

The Best Bond Funds
Municipal Bond Funds

Stock Funds

The Best Stock Funds

No-Load and Index Funds

Index Mutual Funds
The Best Index Funds

Investor Info

Smart Investing
Mutual Fund Investment Advice
Our Privacy Policy

Investing In Stock Funds

Most professional investors use stock funds because of their high potential for returns. Wealth is the best form of marketing, and people become very interested when they notice others making money in the stock market.

However, most investors don't understand exactly how stock funds work and how they are different from other investments.

When you invest in a stock mutual fund, your money is pooled together with other investors and traded for stocks of different companies. These companies use your money to finance their business operations.

To put it simply, when you invest in an equity mutual fund you are giving away your money to different companies. Let's say you invest in a stock mutual fund.

What happens next?

Congratulations! You now own shares instead of money. Those shares are only valuable because you can sell your shares back to the mutual fund company.

The best stock fund investors are self-disciplined and have a high risk tolerance. So how do you know if stock funds are best for you? This guide is going to explain the risks, returns, and reasons why investors choose to buy stock funds. Once you've read all the details about investing in stock funds, you should be able to decide whether stocks are right for you and where they may fit into your portfolio.

How To Avoid Losing Money

If you are going to invest in stock mutual funds, you should be comfortable taking on risk. Stocks carry more risk than other types of investments, and investors are usually compensated for taking on risk.

There are a few important risks you should understand before investing, and the most important risk is loss. Stocks can stop paying dividends or lose value. Mutual fund companies do not guarantee your investment, so you may lose money and never be reimbursed.

Bankruptcy risk is another major risk of stock funds. If a company goes bankrupt, they pay off their creditors in a specific order: bank loans are paid first, then bondholders, preferred stockholders, and finally common stockholders. This means that a bankrupt company may not enough money left to pay shareholders, which makes their stock worthless.

Stock mutual funds try to avoid this risk by buying stock in many different companies, but they still carry some bankruptcy risk.

You may be wondering, why anyone would invest in stock funds?

The reality is, the value and risks of any stock can be measured, and stock funds pay earnings to compensate investors for the risk they take on. You can find out about specific risks by reading the fund's investment prospectus. Fund companies are also helpful in explaining their fund's risks and investment strategies, so I recommend contacting the fund company to find those answers. They can provide a wealth of information about their products.

Remember, don't risk your money unless you can earn a fair profit. This brings us to our next topic: the benefits of stock funds.

Benefits of Stock Funds

Mutual funds that invest in stocks have the highest potential for returns of any other asset class. Stock mutual funds can generally earn more than bond funds and money market funds.

There are two major benefits to invest in stocks: dividends and capital gains.

Companies that earn a profit will normally pay their investors dividends or reinvest the profits in their business. Reinvesting earnings can make a company's stock more valuable, which can increase a stock's value.

Capital gains are paid to investors when a mutual fund sells a stock for a profit. This helps boost returns for investors.

The stock market is one of the most heavily traded financial markets in the world, and there are tons of different types of stocks you can invest in. This flexibility allows investors to specialize and invest exactly where they want to. You can buy stock funds focusing in specific market segments like energy, financial, and utility companies. Some stock funds can also specialize in large, medium, or small sized companies.

Another advantage to investing in stock funds is the lower tax rate on capital gains. The earnings on stock mutual funds are taxed at lower rates than regular income for most taxpayers.

Losses on a mutual fund may even be used as a tax deduction, depending on each investor's tax situation. It helps to know that even if you lose money on an investment, you can still save money on your taxes. Make sure to talk to your tax advisor (or the IRS) for details.

How To Find The Best Stock Funds

It can be difficult for the average person to evaluate a single stock, but it is easy to compare stock mutual funds. After you evaluate risk, you can easily compare historical returns to find the best stock funds .

Historical returns give you an idea of how much money you can potentially earn (or lose) by investing in a stock mutual fund.

CAVEAT: Every fund company is required to tell you that historical returns do not guarantee future results, which is true...

...but we aren't looking for a guarantee, we're looking for a measurement. We already know nothing is guaranteed with stocks.

You need a way to compare returns for different funds and determine which ones have performed better than others.

When you compare returns for a fund, always make sure you compare returns at Net Asset Value (NAV), because you should evaluate sales charges separately. Take note of how long the fund has been around, which tells you how much historical information is available for that fund.

It is also important to learn about the management team that runs each mutual fund; these professionals have control over the fund's portfolio (and your money). You should consider their credentials and experience.

Finally, you should take look at the sales charges and fees that a stock mutual fund charges. Don't pay a sales charge if you can avoid it.

The management fee is what the fund will charge you for managing the fund's assets (the lower the better). Sales charges or expenses are common, but minimizing both will save you money in the long run.

Should I Invest In Stock Funds?

Do you know why you want to invest?

If not, you shouldn't be choosing your investments yet. So many investors (even smart ones!) fall into the temptation of selecting mutual funds without first setting up an investment strategy. This is a great way to get frustrated with your investments.

Before you decide which funds to invest in, you should take some time to go over the investing basics and setup an investment plan for yourself. The time you spend planning could save you a lot of money and stress.

Does this make sense to you? I hope so.

If not, don't have a panic attack! Take a deep breath, and try to use some common sense.

Do you want to have some ownership in a few different businesses? Does investing your money in another person's company sound like a good idea to you? If the answer is no, then stocks may not be for you.

Smart investors know when to say no when it comes to their money.

The most successful stock mutual fund investors are those who have a longer time horizon, ideally at least 5-10 years. If your time frame is below 5 years, you may not want to put any of your available money into stock mutual funds.

If you do decide that stock funds are right for you, make sure to set goals ahead of time and stick to them. Most people start by investing a modest amount of their available money into stock funds, but make sure you choose what works for you.

Return from Investing In Stock Funds back to The Home Page.