The Risks and Benefits of Investments

Question One
One of the key advantages that mutual funds offer in comparison to company stocks is diversification. In particular, mutual funds will offer the investor diversification by means of the coverage of a range of stocks. The inference of this is that a company stock bears more risk in comparison to a mutual fund. Basically, when an investor invests and owns one company stock, then it implies that he bears the risk of the company, which may not be applicable in other corporations within the similar market sector. This means that if the firm goes through an adverse experience, for instance a manufacturing center breaking down, then the investor experiences a loss (Allaria, 2016).
As a result, investment in a mutual fund means that the investor has a number of different assets within the portfolio. This curtails the investor’s general investment risk as it facilitates spreading the risk faced to various assets. Mutual funds provide the benefit of diversifying investor holding not only across different classes of assets but also across different corporations. An additional advantage is that a mutual fund is run by expert managers with great proficiency who make the investment decisions. This implies the investor does not need to spend plenty of time doing company research, which is a necessary aspect that has to be undertaken when making an investment in a particular company stock. Another benefit encompasses size in the sense that owing to the fact that mutual funds bring together the finances of several investors and purchase and also sell stocks in massive volumes, it means that they are able to achieve this significantly cheaper compared to individual investors (Zacks, 2017).
Question Two
There are different types of risk that can be experienced. Two categories of risk include diversifiable risk and non-diversifiable risk. To begin with, diversifiable risk is also referred to as unsystematic risk, non-market risk, or firm-specific risk. This is risk that can be diversified against. Basically, this is risk encompassing things that could be experienced by one corporation, but are not probably going to or bound to happen to all corporations at the same time. Examples of diversifiable risk consists of success or failure to accomplish a demand for a product that is greater or lower than market expectations. Basically, these are risks that are linked to specific events to a company. For instance, the company can experience a lawsuit, face strikes from personnel and even lose key client accounts (Smith et al., 2011).
On the other hand, non-diversifiable risk is also referred to as market risk or systematic risk. In delineation, this is risk that the investor cannot diversify against. It takes into account the market wide risk factors that have an influence on all business ventures. Some of the factors that have a tendency of influencing the prices of securities across the market consist of changes in inflation, economic periods of recession and boom, as well as changes with the flow of finances into the capital markets. Taking into consideration that non-diversifiable risk has an impact on all securities, it cannot be disregarded by diversifying the portfolio of the investor (Smith et al., 2011). It is imperative to note that there are risks linked with making investment in the market. Therefore, this implies that if the market in totality experiences a decline in its value, this is not an aspect that can be simply diversified against. This can also be linked to other risks such as war in a country, political events or even political instability, and also global incidents (Allaria, 2016).


References
Allaria, J. (2016). Why would a person choose a mutual fund over an individual stock? Investopedia. Retrieved 3 October 2017 from: http://www.investopedia.com/ask/answers/05/062305.asp
Smith, J., Smith, R. L., Smith, R., & Bliss, R. (2011). Entrepreneurial finance: strategy, valuation, and deal structure. Stanford University Press.
Zacks. (2017). What Advantages Do Mutual Funds Offer Compared to Buying Particular Stocks? Retrieved 3 October 2017 from: http://finance.zacks.com/advantages-mutual-funds-offer-compared-buying-particular-stocks-5069.html