- Individual shares of common stock represent ownership and voting rights concerning the corporation. Shareholders elect a board of directors, which in turn hires management to run the business. In exchange for committing capital, equity holders are awarded with claims to the assets and profits of the firm.
Mutual funds are actually pools of capital from separate investors that are invested by a fund manager. Although you are allowed to vote upon issues which directly concern your fund, mutual fund investors do not carry voting rights over each individual security that is held within the pool. Meaning, your mutual fund may own shares of Corporation X, but you do not have the authority to attend shareholder meetings of Corporation X and vote.
The mutual fund will issue a prospectus, which spells out objectives and fees. The mutual fund company must honor its prospectus and the diversification standards set by Federal law. - The performance of individual equities is tied to the profits and management decisions of each separate business. Stocks are associated with business risk, which defines the potential for a certain business to fail due to competition, inadequate financing or poor leadership.
Portfolios that carry larger amounts of stocks diversify against this business risk. However, private investors may not have the money or expertise to build diversified portfolios. Mutual funds allow smaller investors to pool money together beneath the leadership of professional management. Shares of mutual funds typically represent claims to an investment pool carrying over one hundred different securities.
Because of the diversification, mutual funds track the overall market or a particular sector of investments more closely than individual stocks.
Mutual funds are typically less risky than individual equities. However, shares of well-managed companies offer much greater potential for performance relative to the overall stock market. - The price of stock is set with each trade per auction markets at worldwide exchanges, such as the New York Stock Exchange. Individual shareholders are able to buy and sell stock "at the market" with this information.
Two groups define mutual fund pricing. Open-end funds are generally bought and redeemed directly with the mutual fund company at net asset value. Net asset value is calculated at the end of the trading session and is set by dividing the fund's assets by the number of mutual fund shares outstanding. Closed-end funds trade on organized stock exchanges, where investors offer premiums or discounts to what the mutual fund portfolio is actually worth at the moment. - Individual stocks are bought and sold through a broker that charges fixed commissions for his services. Investors control their tax bills by buying and selling at particular points to effectively manage capital gains and losses.
Open-end mutual funds charge management fees and "loads," which are percentages paid to the company to manage the money. Further, mutual fund investors have no control over taxes. Mutual fund holders are responsible for their share of capital gains taxes, distributed from the independent trading activity of the fund manager. - Knowledgeable investors who want higher levels of control in terms of voting rights and taxes prefer to buy individual equities that carry greater potential for out-sized returns. Meanwhile, passive and smaller investors are better suited for the professional management and diversification offered by mutual funds.
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