Difference Between Stock Markets and Mutual Funds

In the business world, one of the most important and frequently used financial tools is the stock market. A stock market, equity market or share exchange is the aggregation of investors and buyers of various shares, which collectively represent ownership interests in companies; these can include publicly traded securities on exchanges. These securities are usually issued by publicly traded corporations, although they may also be issued by private individuals. They represent a potential gain (whether real or not) to the investor.

The major difference between stock markets and share markets is that the shares represent an actual asset to the buyers of those shares. That means that when an investor purchases a share, they are buying a claim to a certain amount of the business. While shares on stock exchanges do not represent an actual asset to the buyer, they are still considered a financial instrument by the relevant law and therefore are traded on stock exchanges. This is different from debt instruments such as corporate bonds, commercial mortgages and notes.

Another major difference between the two is that the main goal of the stock market – making profit – requires buying large quantities of highly concentrated shares, whereas with mutual funds all investors purchase shares of a wide variety of different types of common stock. This allows investors the ability to diversify their portfolios, so that some areas of the portfolio are more balanced and some are more concentrated. For example, some investors may prefer to build up their portfolio with blue chip stocks, while others may be drawn to safer, more conservative investments. Also, some investors choose to invest through mutual funds because doing so involves only a small fraction of the overall money supply – and once again, the costs of purchasing shares are relatively small.