Both stocks and mutual funds are popular investments that allow investors to build portfolios and grow their wealth. However, even though mutual funds often contain stocks, mutual funds and stocks have different characteristics that may appeal to other investors with different goals. Here are the main attributes of stocks vs. mutual funds, as well as the advantages and disadvantages.

Stocks vs. Mutual Funds

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

A stock represents a share of ownership in a company. When a company such as Tesla (TSLA) or Amazon (AMZN), performs well, those who own the stock benefit. As the company’s business grows, the stock price usually rises with it, allowing investors to sell the shares for a higher price than they bought them at.

Meanwhile, a mutual fund is a pooled investment that contains shares of many different assets. Many mutual funds include a variety of stocks and bonds, often hundreds. When you buy shares of a mutual fund, you get a share of everything it contains.

Additionally, there are index mutual funds that track popular indexes, such as the S&P 500, that can be purchased at a very low cost. Other funds may be actively managed, where a professional chooses what to include in a mutual fund based on various goals, such as growth or income. Actively managed funds come with higher fees and typically underperform passive funds over the long term. You can purchase stocks and mutual funds through a brokerage account. Employer-sponsored retirement plans, such as 401(k)s, invest mostly in mutual funds, so you may own these funds without realizing it.

Advantages and Disadvantages of Stocks

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

Advantages

• Easy to trade — It’s easy to trade individual stocks through an online broker, and many apps make the process seamless.
• Potential for big profits — Depending on how the stock performs, you could earn big profits. This can lead to more wealth in the future.
• Lower trading costs — In many cases, stocks come with low trading costs. Many brokerages don’t charge trading fees for individual stocks.

Disadvantages

• Potential for big losses – While there is potential for big gains, you could also face big losses if the stock price drops and doesn’t come back up.
• Research takes time – It can take time to research stocks and choose the assets that work best for your portfolio.
• Stress – Investing in stocks can feel like an emotional rollercoaster. It’s important to understand your risk tolerance before you start investing.

Advantages and Disadvantages of Mutual Funds

Mutual funds can add some diversity to your portfolio, but they’re not completely safe. Here’s what you need to know.

Advantages

• Can be low-cost – Many mutual funds, especially passively managed index funds, can be low-cost, meaning they don’t charge large expense ratios or fees. Additionally, some brokerages offer their funds with no trading fees.
• Instant diversification – Because you’re investing in a basket of assets, you immediately have diversification, and therefore lower risk, and you don’t need to buy many individual stocks to diversify your portfolio.
• Can be less stressful – In some cases, investing in mutual funds can be less stressful than investing in stocks. Because you have a diversified portfolio of stocks, the fund is likely to be less volatile than if you only owned a handful of stocks.

Disadvantages

• Some funds have sales “loads” – There are mutual funds that charge a fee when you buy or sell shares. These sales loads can cost you money even before you start investing.
• May have high costs – Some funds charge high expense ratios, sometimes more than 1 percent of your investment in the fund annually, but there are low-cost funds available.
• It may not be tax-efficient – If the mutual fund has sold assets and seen a profit, you may see distributions that create taxable gains. So, even if you haven’t sold your mutual fund shares, you may still be subject to capital gains tax.
• May perform less than the market – If you have an actively managed mutual fund or a fund that is managed by a team of traders, it may not perform as well as the market, and you may even lose money. Expense ratios are typically higher for actively managed mutual funds.

Stocks vs. Mutual Funds: Which Investment Is Better?

Whether stocks or mutual funds are better for your portfolio depends on your personal goals, risk tolerance, and time horizon.

For many investors, it may make sense to use mutual funds for long-term retirement portfolios, where diversification and lower risk are important. For those hoping to capture value and potential growth, individual stocks offer a way to enhance returns but come with more volatility.

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, once you’re more experienced, consider expanding to individual stocks. Consider your goals carefully and create a strategy using investments that will help you get there.

If investing in the stock market seems too risky for you, consider these lower-risk investments for your portfolio.

Conclusion

Stocks represent shares of individual companies, while mutual funds can contain hundreds – or even thousands – of stocks, bond,s or other assets. However, you don’t have to choose one or the other. Both mutual funds and stocks can be used in your portfolio to grow your wealth and help you meet your financial goals. Consider carefully how each may fit your needs and personal investing style.

You might also consider investing in exchange-traded funds, or ETFs. When comparing mutual funds vs. ETFs, you’ll notice a lot of similarities, but there are also differences. Be sure to do your research before investing.