|Investors > Mutual Funds|
Let's suppose that you have $500 to invest in the stock market. However, you are concerned that you might lose too much of your money if you put it all in the stock of one company. So, you decide that you would like to spread your investment into several companies. In other words, you want to diversify your investment as we described in another section. Of course, to diversify your investments, you have to put your money in the shares of companies in different industries so that if the shares of one company you invest in go down, other companies whose shares you are holding may be able to make up for this decrease if they go up in value.
Because $500 is not really enough money with which to diversify your investment, you find three other friends who have $500 each and pool your combined $2,000 ($500 from you and a total of $1,500 from your other three friends). With the $2,000, you purchase about $500 worth of stock in each of 4 companies in different industries, such as the pharmaceutical, banking, computer and automobile industries. Each of the four people who contributed to the pool of $2,000 owns 1/4th or 25% of the investments you have made with the money. This means that each person owns 25% of the dividends, and 25% of the capital appreciation (or the increase in the value of the stock). When the investments are liquidated-that is, when the shares are sold-each person who contributed gets 25% of the amount for which you sell the shares.
The collective investment you have made with the $2,000 pool of cash is really a mutual fund.
This section will give you an overview of mutual funds including the varieties of funds in the market and the suitability of mutual funds for Teenvestors. It wil also help you understand basic terminology in the mutual fund world such as index funds, net asset value, loads, and fees.