What is a fund?

Ryland Goldman - Saturday, May 1st, 2021

Diversification is a key thing to include in every portfolio, but can be difficult if you aren't investing large amounts of money. One way that you can achieve this is by investing in a fund. Rather than owning hundreds of stocks, bonds, or commodities, you can just own one fund that is a basket of them.

There are two types of funds, ETFs and mutual funds. They are similar in many ways, but also have important differences.

Exchange-Traded Funds (ETFs)
ETFs look a lot like a stock at first glance. For example, SPY appears to be a stock. It trades just like one and has a specific price. However, it is actually an ETF. On the holdings page you can see that the fund is actually a basket of all the companies in the S&P 500 Index, including Apple, Microsoft, Facebook, and more.

Mutual Funds
Just like ETFs, mutual funds are collections of stocks. The major difference is that they only trade once every day. Instead of buying shares, you normally put in a specific dollar amount to buy. The price that you buy it at is determined when the stock exchange closes at 4:00 PM Eastern Time.


Next article: What are bonds?