Company
Stocks -
a stock is a unit of "ownership"
or "share" of
a particular company that you have bought into. Once bought, you are
now a partial "owner" of that company. How big a partial
owner depends on how many shares of stock you have bought compared to
the total number of shares that the company has issued. Normally, for
the small investor, your ownership share of a company is very tiny.
You get to vote (usually annually) on who should be on the board of
directors, who should be the accounting firm responsible for
verifying that the company's profit and loss statements are accurate,
and sometimes other issues that may come up in running the business.
The company will mail or email you your voting sheet with both
instructions and the company's recommendation on each vote proposal
as to whether the company is "For" and "Against"
that particular proposal. Company stocks can be instantly bought and
sold during the day when the stock market is open. Therefore, you
instantly know the price you bought or sold it at.
Mutual
Funds-
a mutual fund is a "managed"
portfolio of multiple company stocks
that has a particular "business"
focus
(more on that later**). There is a team of "professionals"
"researching" the companies within a mutual fund on a daily
basis and then deciding when to both buy and sell stocks within that
stated business focus (based on market factors/expectations and
individual company past performance and future performance
expectations). For their "service" there is an annual
percentage fee (normally ranging between 1-2% of the total value of
your share of that mutual fund) that is automatically taken out by
them (whether or not your mutual fund gained or lost money that
year). There is also a dollar fee when you buy or sell a mutual fund
(normally $20 to $40).
Mutual
funds come in two "types" - load
and no load funds.
Load mutual funds initially take out 5% of your investment to start,
meaning that you need to gain 6% just to break even. Never
buy a load mutual fund.
**The
“business focus” of any individual mutual fund covers a lot of
possibilities:
1.
For example, a mutual fund could be focused on a particular
business field.
Examples include autos, health, technology, retail, real estate,
transportation, pharmaceutical, etc..
2.
Also, the business focus could be further directed in different ways.
Focus could be on small
or medium or large size companies or all size companies
and could either focus on a particular business field or all business
fields.
3.
Another aspect of mutual funds is that their individual focus might
be “aimed” at either "value"
companies (normally defined as companies whose stock price is a low
multiplier of their annual earnings) or “growth”
companies (normally no profit companies or high stock price to
earnings ratio companies that are viewed as having high future
potential for sales and eventual profit growth) or both value and
growth companies.
4.
Mutual funds can have a geographical
focus. For example, just US companies or companies from any other
individual nation, or just European or Asian or Latin America
companies or “emerging markets” (newer markets anywhere in the
world that the mutual fund thinks has larger than normal growth
potential).
5.
Mutual funds can also focus on “index”
funds – existing well known stock market funds such as the Dow
Jones, S&P 500, Nasdaq 100, etc.
Finally,
when you buy or sell a mutual fund, unlike stocks, there is no
instant transaction created.
Instead, each day after the stock market closes, the value of that
mutual fund is determined. It is that end of the day price that will
be used to settle your buys and sells placed when the stock market
was open. You can also buy and sell mutual funds after the stock
market is closed, but the price you will receive will be determined
at the end of the next stock market business day.
ETFs
– short for Exchange Traded Funds. Essentially,
ETFs mirror Mutual Funds except that no team of professionals are
researching them to determine when to buy and sell them on a daily
basis. Therefore, there is no annual percentage fee and normally no
cost to buy and sell them. ETFs are especially useful for buying and
selling index funds cheaply (normally no cost or possibly $5 cost).
When I want to buy an index fund, I like to buy it through an ETF
rather than a mutual fund.
