Stocks vs. mutual funds: Which should you invest in?

Stocks and mutual funds both offer ways to construct a portfolio, but there are differences in the way they operate, as well as what you can expect in the long run. Here are the key features to compare.

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Stocks and mutual funds are both popular types of investments, allowing investors to build portfolios and grow their wealth. However, even though mutual funds often contain stocks, mutual funds and stocks have different traits that can appeal to various investors with different goals.

Here are the key features, as well as pros and cons, of stocks vs. mutual funds.

Stocks vs. mutual funds

Stocks and mutual funds both offer ways to construct a portfolio, but there are differences in the way they operate, as well as what you can expect in the long run.

The pros and cons of stocks

Stocks offer a potentially valuable way to grow your wealth and take advantage of big price moves, but they also come with some drawbacks.

Pros

Cons

The pros and cons of mutual funds

Mutual funds can provide some stability in your portfolio, but they aren’t foolproof. Here’s what you should know.

Pros

Cons

Which is a better investment?

Whether stocks or mutual funds are better for your portfolio depends on your goals and risk tolerance. For many investors, it can make sense to use mutual funds for a long-term retirement portfolio, where diversification and reduced risk might be more important. For those hoping to capture value and potential growth, individual stocks offer a way to boost returns, as long as they can emotionally handle the ups and downs.

For beginners who have a small amount to invest: Starting with index mutual funds and making regular contributions can be an effective way to build a portfolio. Later, after becoming more experienced, consider branching out into individual stocks. Carefully consider your goals and use investments to create a strategy designed to help you get there.

The bottom line

Stocks represent shares in individual companies while mutual funds can include hundreds — or even thousands — of stocks, bonds or other assets. You don’t have to choose one or the other, though. Mutual funds and stocks can both be used in a portfolio to help you grow your wealth and meet your financial goals. Carefully consider how each might fit your needs and personal investing style.

Last updated on February 6, 2022, and last reviewed by an expert on January 28, 2022.
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