Before I started to learn about investing in the stock market, I always heard the term mutual funds. I never really knew what it was, so I thought it worthy enough for a post to inform you about them.

Well, you probably already know that stocks are a direct ownership in a publicly held company. Mutual funds are kind of the same thing. The way it works is that mutual fund companies buy so many shares of different companies, and you in turn purchase a share of the mutual fund. Your mutual fund does as well as all of the shares which are collectively owned by the single mutual fund that you own. Say you own Mutual Fund X that owns shares in Microsoft, P&G and AT&T. It should be noted that if you own one share of Mutual Fund X, you 99.99% of the time will own only a portion of stock in Microsoft, P&G and AT&T.

Why am I telling college students about this?

Because mutual funds are a safe investment. If you’re not too familiar with the stock market, analyzing and purchasing stock can be a tedious process. But the reason I call your attention to mutual funds is because they are managed by professionals (some people have differing opinions on the bias of these managers, but the averaged mutual fund manager in America has some 25+ years experience).

So how does that make mutual funds a safe investment?

Less risk. Because there are so many stocks owned by a single mutual fund, the risk is decreased significantly. Think of it as apples. Say Billy has an entire basket of Granny Smith apples (for purposes of my example, consider this stock) and Johnny has a basket of some Granny Smith, some Macintosh and some Golden Delicious apples. All of a sudden on the 6 o’clock news, apple farmers are talking about how a poisonous worm has infected all their Granny Smith apples and if you bought them, you’re highly suggested to throw them away. Johnny loses some apples, but not nearly as much as Billy did.

Long story short, if a company held by your mutual fund goes belly up, it won’t hurt you as badly because you have plenty of other companies working to your advantage.

We can’t say for sure what is going to happen to the market or what mutual funds you should invest in, but if want to put your money somewhere, mutual funds are not a bad way to start off your retirement account. Obviously, as you become more familiar with the market, you will be able to take more risk for a greater return.

We’re doing our research; check back to our investing section to see how the stock market can benefit the college student. If you are experience, and want to continue researching, check out our favorite resource.

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