Beginning investors are often indecisive about whether to invest money in equity trading or in mutual funds. Equity trading involves buying and selling an individual stock and other marketable securities, such as options. Mutual funds pool money from numerous investors and buy a basket of stocks, bonds or other securities. Investing in equities or mutual funds offers advantages and disadvantages. Understanding the difference between equity trading and mutual fund investing can help investors make investment decisions that benefit their personal financial situation.
Diversification is an important aspect of investing in securities because it reduces your risk of sustaining substantial losses. Equity trading involves investing in individual stocks rather than a portfolio of stocks. To achieve diversification with equity trading, you must invest in a variety of industries and stock classes. According to Dan Weil of Bankrate.com, investors should purchase at least 20 individual stocks to achieve adequate diversification. A primary benefit of investing in a mutual fund is immediate diversification. Mutual funds invest in a variety of assets, which reduces the risk of your portfolio underperforming. Investing in a mutual fund that holds 20 different stocks is less expensive than investing in 20 individual stocks.
When an investor sells a stock for a profit, the investor realizes a capital gain. In contrast, an investor realizes a capital loss when a stock is sold for less than the purchase price. You must pay a capital gains tax when you earn a profit. In equity trading, you are in complete control of when you sell a stock and pay a capital gains tax. Taxes for mutual funds are more complex. The fund manager decides when to buy and sell assets, and therefore is in control of when a capital gain is realized. When a fund manager sells as asset for a gain, you are responsible for paying taxes.
Differences exist between the trading fees of equities and mutual funds. With most brokerage firms, you must pay a fee each time you buy or sell a share of stock. Discount brokerage firms typically charge investors low trading fees, but do not provide much customer support. The fees associated with mutual funds vary widely per fund. Some mutual funds charge transaction, management and accountant fees and other expenses. Mutual fund companies usually take fees directly from an investor’s account.
Individuals involved in equity trading typically manage their own stock portfolios. Researching each stock you desire to purchase requires a great deal of time as well as an understanding of financial concepts. You will also need to reallocate your assets periodically to maintain diversification in your portfolio when one group of assets experiences large gains while another group experiences losses. Mutual funds hire fund managers to watch investment portfolios. Money managers thoroughly research investment options and possess an understanding of how investments work. A good money manager is especially beneficial for investors with little experience.
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