What is a stock fund?
Stocks are ownership stakes in publicly-traded corporations and offer investors an opportunity to share in a company’s growth. It is important to educate yourself on the pros and cons of stock investing. Stock funds are generally easy to buy and sell, stay ahead of inflation and grow with the economy.
Stock funds tend to have a higher risk and in turn offer the potential for a higher return. They fluctuate in price as the economy waxes and wanes. In the long run, investors may find themselves rewarded for putting up with the volatility. That's why mutual funds, which invest in multiple stocks and possibly some cash, are often attractive to investors who are putting aside money for retirement and other long-term goals.
How do stock funds generate a return?
A share of stock generates a return for investors in two ways. First, if the company grows and makes money, then the share price is likely to go up. The increase in share price is known as the capital gain. On top of that, many companies pay out a small amount of profits to shareholders each year. The payment is known as a dividend.
Some stock funds are managed to maximize dividend income, some to maximize the amount of capital gains and some to get the best mix of both (known as total return). In general, more investment income could mean less risk. Likewise, some stock mutual funds invest in a broad mix of companies, while others may concentrate only on small companies, international companies or companies in certain sectors such as technology or energy.
What are the risks of stock funds?
All stock funds bear some level of market risk, but they may be a good choice for long-term investors who can tolerate the intermediate ups and downs on the way to their goals. There is always the possibility that you could lose your entire investment if a company does poorly.
As with any financial decision, be sure to educate yourself on various avenues for investing and the risks.