If you’d like to get into the stock market, but you don’t feel comfortable studying companies and how they’re doing, there’s still a way to invest.
They’re called mutual funds. When a group of people put their money together and pay a manager to buy stocks from many different companies, they’ve started a mutual fund. When you buy into a mutual fund, you become an investor in many different companies. As a result, you don’t have to watch the ups and downs of each stock; you just follow the overall value of the mutual fund.
The idea behind a mutual fund is that it “spreads risk.” That means that if the fund invests in Company A, and its stock loses value, then another company in the fund, Company B, may, on the same day, increase in value. The gains in Company B may even cancel out the losses in Company A — so you might not lose anything.
Do you see how, by spreading the risk, the mutual fund can act as a buffer against losses?
Of course, not all mutual funds gain in value. Sometimes more stocks in a mutual fund lose value than gain, and the value of the fund goes down. The stock market makes no promises!
Remember, if you don’t want to risk losses on your money, you can grow your money safely in savings accounts, certificates of deposit, or money market accounts.
Click the Next button to learn about capital gains.