The Basics of Stock Funds

Stock funds are one of the most common types of mutual funds in the market today. This type of fund carries with it some unique features when compared to other mutual funds. Here are the basics of stock funds and what they can offer you as an investor.

Stock Funds

Stock funds are mutual funds that invest solely in corporate stocks for their underlying investment. Investors will invest money into the fund and the fund manager will use the money to purchase stocks. The fund management team will put a great deal of research and thought into each individual stock purchase. Depending on the strategy of the fund, they will try to select the stocks that will provide the best returns for the investors.

Diversification

One of the major benefits of investing in a stock fund is that you will get diversification. When you purchased a share of a stock fund, you are going to become a partial owner of thousands of different shares of stock. You are buying a piece of a very diversified portfolio that has much lower risk than if you were to purchase individual stocks. Most people do not have enough money to buy the amount of stocks that it would take to become diversified. This leads them to investing in a small number of stocks and increasing their portfolio risk. The stock fund provides a way to overcome this problem.

Compared to Other Funds

The stock fund has some unique characteristics when compared to other types of mutual funds. For example, the balanced fund is another type of mutual fund that many people commonly invest in. With a balanced fund, the fund manager will select several different types of securities such as bonds, money market investments, as well as stocks. This is done to try to limit the risk of the portfolio. With a stock fund, no attention is given to other types of securities. The fund manager is only focusing on the stock market at all times. 

Income funds are another popular type of mutual fund that strive to provide regular income payments to the investors. While you might receive a few small dividend payments from a stock fund, this is not the primary objective. The fund managers of a stock fund are trying to provide capital appreciation for the investors above anything else.

Performance

Stock funds typically perform well over the long-term. This means that you will need to stick with this type of investment for a long time horizon if you plan on being successful. In most cases, you will want to devote at least five years to holding the shares in a stock fund. Otherwise, it will come down to properly timing the market. Stock funds are known for their volatility and trying to time them is usually a losing proposition. It would not be out of the question to earn between 5 percent and 10 percent annually with this type of fund.

Types of Funds

Growth funds, value funds, and sector funds are a few of the different types of stock funds that are available. All of these have their own unique features that make them attractive investments as well.

 

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