Stock Market
Mutual Funds

It is always a better idea to purchase mutual funds rather than directly putting your money in the stock market. In fact, mutual funds are set up by investment firms who put together investors' money and utilize the amount to endow in a variety of bonds, stocks or even cash. In other words, when you endow in mutual funds, it is much akin to engaging your personal expert to manage your money. The best thing about the mutual funds is that the fund manager who handles the mutual fund takes all the decisions regarding purchasing and selling stocks and bonds on your behalf, while you can spend your time fruitfully elsewhere. Such a situation is just perfect for people who don't have sufficient time or expertise to study each company separately and take a decision on whether it would be wide and profitable to purchase stock of a particular company at the prevailing price. This is one particular reason why the mutual funds have significantly gained in popularity during the past few years or so.

Compared to the substantial stock commissions, the mutual funds offer people an assortment of choices or diversifications on the spot in return for a moderately small charge. It is interesting to note that when you make a minimum deposit of $2500, or occasionally even less, in mutual funds, you are able to purchase a segment of a basketful of stocks. In fact, with the rapidly increasing popularity of the mutual funds, many companies have now raised the minimum investment amount from a mere $100 to $2500. Those who are keen on investing in mutual funds need to begin by going through the financial segment of their neighbourhood newspaper. While scanning the financial pages of the newspapers, one would be surprised to find more than 7000 mutual funds, each having its individual approach and stratagem. People are free to opt for the ones that they think suit their plans and/ or requirements best.

Once you have decided to invest in mutual funds, there are numerous options present before you. For instance, you may purchase in mutual funds that endow in stocks (also known as stock fund), bonds (called a bond fund), or technology (known as sector fund). In addition, there are mutual funds that invest in international or overseas stocks and are called an international fund. The fact remains that irrespective of the kind of mutual fund you want to put your money into, you will always find one that suits your desires and requirements.

Having found a mutual fund that meets all your requirements and objectives, all you need to do is dispatch a cheque to the invest firm managing the particular mutual fund. As there are numerous mutual funds available in the investment market, it is essential that you spend adequate time in selecting the right one suiting your goals as you would have done before investing in the stock market where hundreds of thousands are stocks are available for the grab. Always remember that while the majority of the mutual funds performed exceptionally favorably all through the 1990s, several of them have also tailed off at some point in the recent past. Hence, it is very important to find and then purchase a mutual fund that remains unbeaten or does well even while there is a slump in the market.

If you are wise enough, you should always try to find and invest in mutual funds that are come under the 401 (k) or a voluntary tax-deferred savings scheme that are offered by several investment firms. In fact, it is interesting to note that the wide acceptance of the 401 (k) savings plan was one of the primary reasons why numerous people initially took to investing in the stock markets. In fact, the best part of the 401 (k) plan is that an investor doesn't have to pay any taxes on the earning from the investments till he or she is 59.5 years old. In case, the investors leave the investment firm before he or she attains the age of 59.5 years, they are able to switch over from the 401 (k) plan to an IRA or Individual Retirement Account, which is also a different tax-deferred savings plan.

Why people opt for mutual funds

Have you ever tried to know why most people prefer mutual funds to the stock market? If you still haven't, let us tell you that the reason for this is simple economics or financial security. Actually, when anyone decided to invest in mutual funds, he or she has the benefit of an assortment of choices or the facility of diversification. This means that as a substitute to putting all their money only in one stock, which is often a very risky decision, they are capable of purchasing segments of several stocks with the same amount. For instance, supposing that the major part of an investor's money was put in WorldCom on the very day that the company declared that it had earlier erroneously declared its proceeds by $3.8 billion. In this case, the latest declaration by the company results to a drop in its share value by more than 90 per cent in just a single day! In the event of investing in the stocks of this particular company, you would have actually lost more than 90 per cent of your hard earned money. Contrarily, if you had purchased a mutual fund that owned the company - WorldCom - your financial loss would not have been more than three per cent on that particular day! Hopefully, this example will help you to understand why purchasing mutual funds is better than investing in the stock markets any day.

Then again, some people want more and instant profits and this is the basic reason why they are drawn towards the stock market. It is common knowledge that though investing in the stock market is a highly risky venture, the stock markets also often yield higher returns. For instance, if an investor owned a mutual fund that comprised a stock whose price raised substantially on the very first day, he or she would merely make a profit of one or two per cent on their investment on that particular day. Instead, if the person had directly invested in the stock of the company, his or her earning would be as high as 10 to 20 per cent or even more on that particular day or the couple of days following the raise in the price of the company's stock.

Net asset value

The net asset value or NAV is akin to a stock price. In principle, the net asset value denotes the price of one share in a mutual fund that comprises an assortment of shares. In fact, you will be able to find the net asset values (NAVs) of particular shares in the business section of your daily newspaper. The arithmetic is very much alike to what is applied for a particular stock. For instance, if an investor wants to purchase 100 shares of a mutual fund having a NAV of $10 each, it will cost him or her $1000. In addition, the investor will be required to pay a very little management charge that is to be plainly deducted from the net asset value or NAV.

In fact, it is also possible for an investor to find out how his or her mutual fund performed at some point in a week - ranging between the previous day and three years back. It must be acknowledged that the mutual fund companies have really done a superb job in enabling their investors to remain aware of their precise performance records over a period of time. This is indeed a great advantage, for if any investor is not satisfied with the performance of a particular mutual fund, he or she is able to easily switch over to another mutual fund.

For an individual who has by no means made any endowment in the stock market may sincerely mull over doing so initially by purchasing mutual funds. For the uninitiated, basically there are two kinds of mutual funds - load and no-load. A beginner would be better off in purchasing a no-load mutual fund because they are not only cheaper, but the investor also is not required to pay any additional sales fees for endowing in this type of fund. Besides, it needs to be mentioned that there is no evidence that the load mutual funds are in any way superior compared to the no-load mutual funds.

Keep your fingers crossed, but the fact remains that thus far, the strictly controlled mutual fund industry has been successful in averting any type of scam that may have plagued a lot of companies in the United States. Nevertheless, it is still possible for an investor to lose money even by purchasing mutual funds. Even in such a situation, the investor would know that he or she is receiving a just shudder in the market. However, under no circumstances will a mutual fund company ever try to fleece the investor.

All said and done, even mutual funds are not totally faultless investments. As in the case of the stocks, there are times when even the mutual funds plummet drastically. Several mutual funds dropped significantly, some of them squandering to the extent of 70 per cent, all through the contemporary bear market (an extended phase during which investment prices fall together with prevalent pessimism). However, this was not the case with all the mutual funds, but several of them. It may be mentioned here that the majority of the mutual funds are created in such a manner that they will perform brilliantly during bull markets when the prices maintain a high over a considerable period of time. As a result, many mutual funds have a tendency to fall short wretchedly during the bear markets. However, there are a few specific mutual funds that perform brilliantly even in bear markets.

Index funds

All mutual funds are operated by professional fund managers who keep track of their funds' performance in the stock market. Accordingly, these fund managers will acquire or sell stocks with a view to earn the maximum money for their funds. As these professional fund managers are actively occupied in enhancing the running of their mutual funds, they are also known as 'active managers'.

However, it needs to be mentioned here that the index funds, though similar to the other mutual funds in a number of ways, are actually operated in a different manner. As in the case of the other mutual funds, index funds too pool in the investors' money. Nevertheless, distinct from the other mutual funds, the index funds do not include 'active managers'. Instead, the index funds just include the stocks that comprise one of the several indexes. For instance, an investor may perhaps purchase the Dow 30 index (DIA), the S&P 500 index (SPY) or the NASDAQ 100 index (QQQ). The plan behind this is that if you cannot defeat the indexes, you may very well connect with them. Hence, in the event of the Dow index performing well and its value has increased by 10 per cent in a particular year, the investor will receive 10 per cent earnings on his or her fund for that period.

When you purchase an index funds, you enjoy a number of additional advantages over the other mutual funds. For instance, the index funds are comparatively cheaper than the other mutual funds as the investor is not required to pay an 'active manager'. In addition, index funds to not chare any supplementary sales fees. These are the two primary reasons that have made the index funds incredibly popular and well accepted by the people. Hence, it is not surprising to find that over 50 per cent of the portfolio managers have been unsuccessful in beating the index funds, and sometimes the story is not even as good. As a result, the index funds are a widespread option.

Always remember that the index funds specially perform well in a bull market. On the other hand, the performance of the index funds is actually appalling during the extended bear market. It may be mentioned here that the prices of key indexes go up continually during bull markets as the investors purchase more and more stocks all through this phase. Conversely, the prices of most of the stock indexes keep dropping constantly during the prolonged bear markets because the investors either avoid the stocks or sell those they own. All the same, index funds that are inexpensive, but high on performance have always attracted numerous investors.

Bear market

There are occasion when the stock market passes through prolonged difficult periods. There have been instances when the prices of stocks continued to fall for several months or even years at a stretch. The history of the stock markets bears testimony of such situations occurring from time to time. All key market indexes, such as the Dow, NASDAQ and S&P 500, continue to weaken for prolonged periods whenever the stock market is formally in the bear market. In such situations, there is a rush to get rid of stocks possessed by the investors as people tend to sell their stocks for whatever price they may get. In other words, when the stock market is officially in the bear market, generally the financial system deteriorates and the proceeds of the business groups continue to fall.

In fact, a bear market is always a difficult phase for the Wall Street. On such occasions, the investors tend to avoid the stock market and instead, put their money in gold, cash or bonds. Even the prominent brokerage firms on the Wall Street either stop hiring new people or worse still; retrench many of their existing staff. As the stock market is often able to forecast the economic scenario, an extended bear market is seen as an indication of an imminent economic depression or recession. Despite the fact that the bear markets have been for somewhat short durations in the past, the fact remains that no one is able to precisely forecast as to how long a bear market will actually last.

Bull market

Bull markets are the best thing that can happen to a stock market as they are especially advantageous for the traders as well as the investors. While plenty of jobs are available on the Wall Street during the bull markets, even the investors are loaded with cash that they keenly utilize to purchase more and more stocks. Everyone concerned with the stock market appear to be in a purchasing frenzy during this phase and the key stock indexes simply move up steadily. Even the common public is in an optimistic mood as the country's economy looks up. An interesting aspect of the bull markets is that you will find almost everyone who is somehow associated with the stock market discussing the amount of money they have made during this boom period. It is interesting to note that during the early part of the 1920s, the bull market was charged up by an enhanced used of electricity and automobiles. However, during the bull market in the 1990s, the Internet was the main driving force that pushed up the prices of stocks.

Sideways market

Simply speaking, sideways market is a situation where stock prices change little over a specific period of time. In fact, the Wall Street is afraid of a sideways market as it is really difficult to earn profits in this type of a market. It is interesting to note that in a sideways market the stock indexes endeavor to move up or fall, but eventually stabilize at the very point they started from. In such market conditions, the investors generally hold their money and disengage themselves from participating in stock trading. For instance, following the stock market crash in 1929, the market touched its nadir after three years and remained in that position of about a decade. And it took almost another 12 years for the market to reach the high prior to the 1929 crash! The stock market witnessed another sideways market in 1966 when the Dow index was at 983.51. In this case, people had to linger for 16 long years for the Dow index to enduringly break 1000 in 1982. However, the Dow index broke through provisionally in 1972 before moving back again. In the interim period, the investors had to endure several mini-bear markets making stock trading difficult.

To Top