What are mutual funds?
In basic terms, a mutual fund is a type of investment that pools money from many different investors in order to purchase other investments, such as stocks, bonds, etc. They are normally managed by a portfolio manager whose goal is to generate better financial returns than the market (e.g. the S&P 500, the Dow Jones Industrial Average or DOW, the NASDAQ, etc.). Think of mutual funds as a basket holding many different stocks, cash, bonds or other securities. The goal is to create a more balanced or less risky portfolio. A mutual fund is characterized by a ticker symbol to distinguish it from other mutual funds. For example, FTQGX (Fidelity Focused Stock Fund), FNCMX (Fidelity NASDAQ Compositive Index Fund) are mutual funds.
Video: Mutual funds
Why investors buy mutual funds.
Investors buy mutual funds for many different reasons. They invest in mutual funds in order to create wealth, achieve financial stability and independence, plan for retirement, vacation, or education. Last but not least, by investing in mutual funds, investors leave the heavy lifting to professional fund managers who research, sell or buy stocks, bonds and other securities for the mutual fund.
How to purchase mutual funds
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Benefits & risks of mutual funds.
How investors make money from mutual funds.
Investors make money in two major ways. First, they earn money through capital gains. A capital gain is essentially the increase in price of a fund to a price higher than the initial purchase price. Second, investors make money through dividends. Dividends are basically free money you get for simply owning the fund or being a fund holder. Dividends are usually paid to shareholders quarterly. Not all companies pay dividends. Mutual funds are meant to be kept for the long-term. Here's a nice overview of how investors earn money from mutual funds. Check out this nice comparison between stocks, ETFs and mutual funds.