Unit 2 · Level 1 · The instruments
Funds: strength in numbers
Buying hundreds of individual stocks yourself would cost a fortune in time and fees. A fund solves this: thousands of investors pool their money, and the fund buys a whole basket of stocks or bonds on everyone's behalf. Own one fund share and you own a sliver of everything inside. That's diversification, the closest thing investing has to a free lunch, for the price of one purchase.
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What you get asked
What does an investment fund fundamentally do?
Pooling is the superpower: with €50 you can own slices of hundreds of companies. One company stumbling barely dents the basket.
ETF stands for exchange-___ fund.
Exchange-traded: an ETF is a fund whose shares trade on a stock exchange all day long, exactly like a normal stock.
What's the key TRADING difference between a classic mutual fund and an ETF?
Buy an ETF at 11:03 and you get 11:03's price. A mutual fund order waits for the single price computed after the market closes.
Match the fund concept to its meaning
Some funds pay managers to actively pick winners; others just track an index automatically. That difference, and what it costs, gets a whole unit next.
Why does owning a 500-company fund carry less risk than owning one favourite stock?
Diversification can't stop the whole market falling, but it erases the risk of any single company wrecking you. Never confuse 'less risky' with 'risk-free'. 🐜
The rest of this unit
Stocks, bonds, funds and cash: what you're really buying.