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There are several products an investor can use to invest in stocks. Individual stocks are an obvious alternative and mutual funds are another. The investor can build a portfolio of different stocks to diversify his or her holdings and accomplish his or her investment objectives.
Investment company is the term that covers a range of stock market products that pool investor money to purchase securities. Mutual funds and exchange traded traded funds, or ETFs, are the two main types of stock market funds. Investors in mutual, or open end, funds purchase and redeem shares directly with the mutual fund company. Different mutual funds cover a wide range of investment objectives and styles. Mutual funds are actively managed and have professional investment managers to select stocks and meet the funds' investment objectives. Stock mutual funds are often available as investment options in retirement plans like 401k plans.
Exchange traded funds are investment companies where the shares trade on the stock exchanges. ETFs track specific stock market indexes such as the S&P 500 or targeted sectors like financial or energy stocks. ETFs are not actively managed, instead they rigidly attempt to track a specific index. Shares of an ETF can be bought or sold at any time the stock market is open. -
Investors can use individual stocks, mutual funds or exchange traded funds (ETFs) for long term investing. Stocks or funds are selected to hold for one year or longer. Investors can use fundamental analysis of factors such as a company's projected sales, earnings history, assets and liabilities to pick stocks or mutual funds based on the projected growth in revenues, dividends and share prices. Growth investors look for companies or sectors which have potential for rapid growth in revenues and profits. Value investors are interested in companies, or mutual funds that hold stock of the companies where the value of the companies business is considered to be greater than the underlying current market price of the companies' stock.
Traders use stocks and funds to seek short term profits. Both individual stocks and ETFs can be used for short term trading. Traders may hold securities from just a few minutes to several months, based in their trading style and strategies. Traders use technical analysis of stock price charts to find patterns of price movement that can be traded profitably. Mutual funds set their prices only once a day and are not suitable for short term trading.
Long term investing requires only occasional review of the investor's stock or fund holdings to determine if they still meet their investment goals. Short term traders must constantly monitor stock markets and their holdings to decide when to buy and sell stocks or ETFs. The universe of ETFs includes ETFs that track popular stock market indexes, or buy baskets of stocks in sectors of the economy such as energy companies or consumer staples. Traders can earn significant profits but face the risk of losing a significant portion of their money because of potential violent price swings of stocks they own. Long term investors often profit from the growth and profitability of well-managed companies.
