Both have benefits. But where should you invest? This depends on your investment style. You need to consider the risk-reward ratio, timeframe, and expenses. But let’s start with a comparison that explains the differences between mutual funds and stocks.

Stocks

When you buy stocks, you become a partial owner of the company. One way to earn from that is through dividends that the company pays stockholders from its profits every quarter or annually. This gives you a steady stream of taxable income as long as you own the stock. Another way to make money from stocks is to sell them for a profit or ‘capital gain.’ Because stock prices change continuously, you can get out anytime during the trading session if the price crashes.

Mutual Funds

This is a fund where a lot of investors pool in their money to buy a lot of stocks, bonds, or other securities. Your mutual fund share gives you a proportional share in its underlying basket of securities. The proportional ownership is reflected in the price of the mutual fund share and is called the Net Asset Value (NAV). NAV is the total value of all the securities in the mutual fund divided by the number of shares. Investors can place an order for MF shares at any time, but the order only executes at the next NAV adjustment at the end of the business day.

Risk vs. Reward

Stocks are riskier than mutual funds. This is because mutual funds are more diversified than stocks. Diversification helps to limit risk, but it also limits return on investment. MFs achieve diversification in a couple of ways. The first depends on the type of the MF — it may contain a mix of stocks and bonds as the latter are relatively safer. The second way is by holding stocks from different companies in one fund. So if there’s a scandal in one company and its value tanks, the MF investor isn’t hit as hard.

Time

Stocks are better for people who understand financial reports, have the patience to evaluate the statements, and can handle the risk. MFs are better for people who don’t understand how to evaluate financial statements and don’t have the time or inclination to learn.