17 July, 2020

Quora Answer: What is Better: a Stock or Mutual Fund?

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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