Stocks and Stock Funds

Want to own part of a company? Just invest in stocks. Also referred to as equities, each stock you own represents a small share in the ownership of a company. If the company does well, the value of your share will likely go up...and vice versa.

Now, if you invest in stock funds, you’re actually buying an interest in a collection of stocks managed by a professional investment manager. Based on the objectives of the fund, the manager decides what—and when—to buy and sell. How well the manager’s selections perform is what determines the value of your investment.

In this section, you can learn more about:

Different Types of Stock Funds

People refer to the “stock market” as if it’s all one thing. But actually, that market can be subdivided into many different types of stocks. Often, when one type of stock is rising in popularity, another may be losing favor. So it’s important to consider diversifying your investments across different types of stock funds, which are typically classified by:

• market capitalization-meaning how large a company the fund typically invests in;
• investment style-meaning whether the fund emphasizes “value” stocks that appear to be selling for a bargain or “growth” stocks that appear to be rapidly accelerating in value.

Market Capitalization

One way that stock investments are classified is by their market capitalization—or the total value of the company’s outstanding shares. Typically, the larger a publicly-held company, the higher the value of its outstanding shares. The capitalization of a company is calculated as follows:

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Stock investments are generally classified as either large-cap, mid-cap or small-cap.

Investment Style

Stock funds are also typically grouped by their “investment style,” meaning what type of stocks the manager prefers.

• Value. Opposite of growth stocks, value stocks are priced low relative to the strength of the company, thus they are viewed as a good “value.” Value managers believe they can spot a bargain, so they look for companies that seem undervalued now—and poised for a turnaround over the long term.
  
  
• Core. Those stock funds that have similar characteristics to the market as a whole are said to exhibit no value/growth style bias and are classified as core funds.
  
  
• Growth. Some managers prefer growth stocks, which tend to have higher prices relative to their earnings. But investors are willing to pay these high prices because they expect the company to grow rapidly.

Risks and Rewards of Stock Investing

The Risks
As with all investments, there’s no guarantee that the price of a stock will go up—or even that your entire principal will be returned. If a company goes bankrupt, common stockholders are the last in line—after creditors and bondholders—to receive any type of compensation.

As a result, stock investments tend to fluctuate more in value over the short-term. So if you happen to need your money during a down cycle, you risk having to sell your stock holdings for less than you paid for them.

The Rewards
While stock investments can subject you to a rockier ride over the short-term, they have historically outperformed other types of investments over the long-term. If, in 1972 you had invested $1,000 each in cash (U.S. Treasury bills), bonds, and stocks, your investment would be worth this much today: $6,908 cash, $12,933 in bonds, or $31,918 in stocks.

Source: Calculated by Diversified Investment Advisors using information and data presented in Ibbotson Investment Analysis Software, ©2001 Ibbotson Associates, Inc. All rights reserved. Used with permission. Stocks are represented by the S&P 500 Index, an unmanaged index generally considered representative of the stock market. Individuals cannot invest in an index. Bonds are represented by long-term (average maturity of 20 years) Government bonds. Cash is represented by 3-month US Treasury Bills. Past performance does not guarantee future results.

Need more details on investing in stocks?
A Guide to Stocks, and Understanding Stock Indexes.