Lets start off with what a mutual fund really is. A mutual fund is an association or organization that invests in an abundance of different equities. This could include bonds, stocks, options, commodities, etc. When buying a mutual fund, you are investing in the securities that the mutual fund plans to invest in. For example, a fund might allocate money in the following ratio: 80% Technology, 10% Medical, and 10% Natural Resources.
There are many different types of stock funds. Growth funds are funds that buy stock in companies the fund believes to have an immense opportunity for growth. Sector funds, are funds that invest in the broad sectors of the markets, and index funds invest in indexes such as the Nasdaq, S&P 500, and the Dow Jones. In the current economic condition, index funds have been triumphant as the U.S. markets are reaching 52-week and all-time highs. These are just a few of the different types of mutual funds on the market.
Many investors compare mutual funds to common stock. This is a false comparison. Unlike mutual funds, the share price of a stock is dependent on investors' emotions and swaying of the markets. Mutual funds are priced at the net asset value (NAV) of the fund. To find how much a share of a mutual fund is worth, you divide the value of the cash and securities in a funds portfolio, less all liabilities, by the total number of outstanding shares. Then by dividing the NAV value by the outstanding unit, you are left with the price per unit. So a mutual fund is priced at how its investments are doing and the existent position in the portfolio.