What is a mutual fund?
You know what a company's stock is. You've watched CNBC or Bloomberg
and you know the stocks of Google, Amazon.com, Disney, and Coke.
They have symbols like GOOG, AMZN, DIS and KO, respectively.
You would use those symbols if you wanted to buy or sell THAT
COMPANY'S INDIVIDUAL STOCK.
A mutual fund is simply a single
representation (one ticker symbol representing the mutual fund) of a basket of stocks
that the mutual fund manager has selected, hoping to grow the value
of that basket of stocks.
The formal definition
Fund is a professionally-managed type of collective
investment vehicle that pools contributed money from
many investors and invests it in stocks, bonds,
short-term money market instruments, and/or other
Mutual funds have a fund manager that trades the pooled
money on a regular basis. The net proceeds or losses are
then typically distributed to the investors annually.
The increased (or
decreased) value of individual stocks are then weighted within the
fund, to determine the increased (or decreased) value of the mutual
fund as a whole, which is reflected in its trading price daily.
(See example of CGM Focus Fund's - CGMFX quote -
Many people like you invest their money in the mutual fund which
then invests in various stocks and possibly other securities like
bonds or cash or commodity instruments.
Each mutual fund has a "manager" or
"investment advisor" who has the responsibility of directing the
fund and deciding what and when to buy and sell securities that will
maximize the value of the fund as it is reported quarterly.
Every three months, or quarterly, the mutual fund is required to
report to the Securities and Exchange Commission (SEC) the list of
the securities it currently holds and the amount of each security,
in addition to an update of its investment objectives and other
comments about its fund.
Many of these funds can be seen here:
NEXT: Types of Mutual Funds...