Mutual Funds: Mutual Funds Defined
The majority of mutual funds invest in stocks or bonds. Before we define what is a mutual fund, let’s briefly
define these two basic types of investments used with mutual funds.
Stocks
A stock is a portion of ownership in a corporation. When you buy a share of stock, you are buying an ownership interest in the
company that issued the stock. Shares of stock in publicly traded companies are bought and sold on an open market.
The stock is worth what “the market” (people buying and selling the shares) perceive it to be worth. Stock prices go up and down
based on many factors especially the perceived earnings potential of the company. Examples of large public companies are Microsoft, McDonald’s and 3M.
Bonds
Bonds are are debts issued by a company or government to raise money (capital). They guarantee payment on or before a defined
date of the original investment plus interest. When you buy a bond, you are lending money to a company or government.
Bonds pay either fixed or floating interest, known as the coupon. As interest rates fall, bond prices rise and vice versa.
There are many different types of bonds and many different types of bond mutual funds. See
About Bond Funds
for more info.
Mutual Funds
A mutual fund takes in money from investors and invests it usually in stocks and or bonds using a defined investment objective. A
mutual fund pools the investments of many investors.
The combined investment holdings that the mutual fund owns are known as its
portfolio.
When you invest in a mutual fund, you buy shares of the fund and become a shareholder of the fund. Each share represents an investor’s
portion of the ownership of the fund’s holdings and the income those holdings generate.
A mutual fund has a fund manager who is responsible for investing the money.
Though most mutual funds invest in stocks or bonds, they can also invest in short-term money-market instruments, options,
commodities, or other securities or assets, or some combination of these investments.
You should check into a mutual fund before you invest in it. We provide more information about how to do this in other
pages on this site.
Next: How To Buy & Sell Mutual Funds
