The following is my answer to a Quora
question: “What
is better: a stock or mutual fund?”
When you buy stock, each stock is the
purchase of shares in individual companies. The advantage is that gains are more easily
realised. In effect, a gain in share
price may give you a potential profit may times what you paid for that stock. The disadvantage is that your investment is
tied to the performance of the stock, and a drop in share price could result in
you making a paper loss. There is more
volatility here.
When you buy into mutual funds, you are,
in effect, buying into multiple stocks in many companies. Due to this, the potential gains will not be
as much as that of that from a single stock. However, because of the inherent
diversification of the index, you are unlikely to make precipitous losses since
that would involve the entire market losing capitalisation, not just a single
stock.
You choose either, depending on your
preference and risk profile, or you can choose both, and diversify your
portfolio.
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