It is a quite common question for many who would like to enter into investment option in the share market or related investments. Both the shares and mutual funds have its own risks and advantages but the level of advantage and disadvantage differs between these both. Once, if you become through about what is the difference between shares and mutual funds, most your doubts will be cleared and can choose your choice of investment.
Difference Between Shares and Mutual Funds
Being an investment options, both the shares and mutual funds have its own benefits and risks. However understanding it better will guide you on the proper track for a safer choice of your investment.
What do you mean by Shares and how does it work?
If a company wants to go on for its expansion or enhancement for its new production or advancement it would need an additional capital. This capital requirement will be divided into small units of equal shares. Dividing the capital requirements into small units are literally called as “Shares”. These shares (small units) are then sold to public through stock market to fulfill the company’s capital requirement. As you buy these shares by paying certain amount, the amount paid by you forms the company’s capital.
This process of selling the initial shares to the public is called IPO (Initial Public Offer) that is issued during the first time. In case of additional capital requirement for the company, it would go for an FPO (Follow-on Public Offer).
Once you buy the shares of a particular company, you are becoming a shareholder of that company and you are acquiring the rights of voting for company affairs. Further, the shareholder holds ownership of the company to the extent of his shares. If you are buying shares of a company, you are also a owner of the company “only to the extent of shares that you hold”.
Shares can be well explained through and example:
Let us assume for example that a company has an asset value of 1000 crores and it is going for a public issue of Rs.200 crores. This is 20% of the company’s total value. Here, let us say that you are buying its shares worth Rs. 10 crores from the above IPO. Now, you are holding an ownership of 2 per cent of the company along with voting rights and profit sharing worth 2 per cent of the company.
Those who were not able to buy the shares from the stock market can later buy them from another investors (like you) or from a trader. Here, the share value differs or fluctuates based on the trends of the market and the performance index of the company including many other factors. The investors may either make profits or may lose. Now, the buying and selling (trading) of shares are directly handled in the market out of which the company never gets money.
However, as the shareholders profit and loss depends on the company’s performance – on a cautious note – if the company doesn’t perform well the investor will lose his money.
With these above give circumstances, if you want to make a profit from shares – one must chose the best company to buy its shares. You must be aware of what is the existing price of the share? Additionally, you must also know how many shares can be bought from a certain company and how long can you keep these shares with you? To have all these guidance, one must have to go to a fund manager or to a better consultant.
What are Mutual Funds and How do they work?
Above, if you have well understood about the what are shares and its functionality – understanding mutual funds are simple. Mutual funds are entities held by fund managers. Fund managers are those are experts in financial products in the market and have good knowledge and grip of the stock market.
These fund managers will collect money from the investors and invest them into shares on behalf of the investors. In case of shares – you buy the shares directly from the companies. In case of mutual funds – the fund managers acts as share holders on behalf of you (the investor). Since, these fund managers have up-to-date market knowledge about the companies performance in the market, they’ll be able to decide on number of factors like – when to buy or sell a share, which are all good performing companies, how many shares can be bought, how long the shares can be held, etc.
Since the fund managers handle everything in the market you are at less risk. Unlike shares, in mutual funds – you’ll not directly deal with the shares of a company. Mutual fund market is between you and the fund manager. Since they buy shares on behalf of you, with your investment, end of the day, they publish the existing value of shares which is called as NAV (Net Asset Value)
Types of Fund Management in Mutual Funds
There are two types of fund management that exists – Active Fund Management and Passive Fund Management.
Active Fund Management is being referred to funds being managed by the fund managers looking into the share market continuously for opportunities to buy and sell the shares.
Under Passive Fund Management, the fund managers do not venture into anything better than simply following BSE and NIFTY.
With these above detailed explanation one should have a basic knowledge about what is share and mutual fund. If you are starting to think about investing into share markets and related investment options, one must definitely know what is the difference between shares and mutual funds. As explained above, both the investment options have its own advantages and risks behind.