March 29, 2010
"Stock fund" and "equity fund" describe a type of investment company (mutual fund, closed-end fund, unit investment trust (UIT)) that invests primarily in stocks or "equities" (as contrasted with "bonds"). The types of stocks in which a stock fund will invest will depend upon the fund’s investment objectives, policies, and strategies. For example, one stock fund may invest in mostly established, "blue chip" companies that pay regular dividends. Another stock fund may invest in newer, technology companies that pay no dividends but that may have more potential for growth. Another type of stock fund—an index fund—invests in stocks of companies contained in a particular market index. (There are also index funds that invest in bond indices.)
Like any investment, stock funds are subject to various investment risks. The prices of the stocks of companies in which the funds invest may fluctuate based on changes in the companies’ financial condition and on overall market and economic conditions. This can affect the performance of a stock fund. Some stock funds attempt to minimize these risks by spreading out ("diversifying") their investments among different companies, industries, and markets. If a fund is diversified, its prospectus will tell you this.
Before investing in a stock fund, you should carefully read all of the fund’s available information, including its prospectus and most recent shareholder report.