What Is A Mutual Fund?
A Mutual Fund is a way for people with common financial goals to pool their
resources together in one professionally managed investment that holds different
securities. At the top is a Mutual Fund Company (i.e.: Princor, Oppenheimer, etc..).
Each mutual fund company has various mutual fund(s). Most mutual fund
companies have more than one fund and each type of fund is categorized by different
criteria (i.e.: taxable vs. tax exempt, stock vs. bond, etc..) Each fund invests in
securities such as stocks, bonds or other specialized types of investments based on a
specific objective. Typically a each fund has many different stocks and/or bonds in their
portfolio spread out over many industries and geographic locations. A Key benefit of
a mutual fund is it's simplicity. Rather than having to choose individual
investments by yourself......a sometimes risky and time consuming process....you can rely
on a on the experience and expertise of professional money managers to make those
decisions.
What Are Stocks?
Stocks represent units of ownership or shares in a company. Also referred to
as common shares or equities. These shares are traded in this country in stock
markets such as the New York Stock Exchanges (NYSE) or the Nasdqq Stock Market and on
similar markets abroad. stock prices go up and down on a daily basis which can
be quite unnerving. However, compared to other types of investments, stocks have produced
the highest long term returns over the past several years.
What Are Bonds?
Bonds are essentially IOUs issued by Corporations or governments in exchange for
your loan to them. They promise to pay you interest on your loan in specified
intervals (monthly, quarterly, annually, etc..) as well as promise to repay the principal
amount of the loan on a specified date in the future (usually 30 years). Like
stocks, bonds are traded in exchanges markets here and abroad
What Is Diversification?
The adage "Don't put all your eggs in one basket" is the essence of
diversification. A mutual fund holds +many different investments. That way the
poor performance of one investment should not have as dramatic of an effect on the fund as
a whole because it may be offset by the gains of other investments the fund holds.
Because your money is pooled with that of others, the mutual fund is able to invest that
money in may-perhaps even hundreds-of different securities. On your own, you would
probably only be able to invest in a very limited number of securities.
