As mutual funds and stock trading both play a part in the investment world, there is always a question as to which of the two options is better.
While some people choose between these two by their judgment, some do extensive research and go for what has been proven to be a better or optimal option.
If you’re looking to trade in the stock market, mutual funds are not for you. While they may be low-risk investments for some, their long term benefit is relatively unpractical compared to regular stock trading.
The first option that many people often consider is stock trading. Stock markets allow purchases on financial instruments such as stocks, debt securities etc., from brokers who, from time to time, update the price on company shares.
On average, investing in stocks involves relatively high entry costs. Still, investors gain high rewards if they invest correctly because capital gains taxes are lower than short-term income tax rates.
In addition, investors can trade stocks at their leisure. As many financial companies offer easy trading services, it is easier for people with little investing knowledge to invest in the stock market. All one needs is a mobile phone or a computer and internet connection plus an account with the company they are doing business with.
The downside of this investment method is that it involves high risk because rewards are low compared to mutual funds, while broker fees are also involved.
The second option under consideration is Mutual Funds which have pros but come about higher risks due to fluctuations in share prices being more volatile than regular shares. Here, investors get to purchase financial instruments such as stocks without worrying about the problems associated with analysing reports or evaluating companies.
Mutual fund investments are diversified because investors get to be part of a group where they have mutual interests. However, broker fees are also involved with this option, although these are lower than when trading stocks.
Mutual funds vs stock trading
Mutual funds are collective investments by professionals in which a group of people pool their money with an investment firm or bank, which uses it to purchase stocks according to its clients’ wishes.
This is usually done with large corporations that have been around for decades and are more likely than smaller companies to survive in the future. The benefit of this strategy is that having multiple investors minimises the risk because if companies within your portfolio goes under, there’s more than enough left over to cover the loss.
However, this benefit doesn’t come without a cost. You can buy and sell mutual funds whenever you want, the only time your money is truly liquid is when you sell it– which means if mutual funds are part of your investment strategy, you are stuck with them for longer than the average stock trader would be.
And while long term investments are meant to be low-risk, it’s not always the case with mutual funds that take shortcuts by squeezing their profits through fees.
If you’re looking to trade in the stock market, mutual funds are not for you. Their long term benefit is relatively unpractical compared to regular stock trading.
To conclude, when it comes down to deciding whether you want investment via stock markets or through mutual funds, individuals must bear in mind that both options carry their merits and demerits since risk always plays a vital role in finance.
It is advisable for individuals looking into the long term to go for investing via mutual funds, while those playing the short game may consider using stock market trading.
Investors are showing top-rated mutual funds should talk to Saxo Bank and trade on the demo account they developed before making investment in real money.