Stock Funds !

Stock funds invest primarily in stocks. A share of stock represents a unit of ownership in a company. If a company is successful, shareholders can profit in two ways: the stock may increase in value, or the company can pass its profits to shareholders in the form of dividends. If a company fails, a shareholder can lose the entire value of his or her shares; however, a shareholder is not liable for the debts of the company.

The upswings and downturns of the stock market affect stock funds. Despite a history of outperforming other types of securities, stocks sometimes lose money (see chart below). Sometimes these losses can be substantial and last for long periods. The recent S&P 500 annual returns of 20 and 30 percent are unprecedented, and cannot be counted on to continue in the future. The average rate of annual return from 1926 to 1999 is about 11 percent. Most experts expect stock market returns to revert to their historical range.

When you buy shares of a stock mutual fund, you essentially become a part owner of each of the securities in your fund’s portfolio. Stock investments have historically been a great source or ncreasing individual wealth, even though the stocks of the most successful companies may experience periodic declines in value. Over time, stocks historically have performed better than other investments in securities, such as bonds and money market instruments. Of course, there is no guarantee that this historical trend will be true in the future. That’s why stock funds are instead used as long-term investments.

Stock prices move up and down for a variety of reasons— some of them affecting the entire
market, others limited to particular industries or companies.