What Is a Common Stock Fund?

A common stock fund is a mutual fund that invests in the common stock of numerous publicly traded companies. Common stock funds provide investment diversification and offer time savings over researching, buying, and selling individual stocks.

Key Takeaways

  • A common stock fund is a fund that invests in the common stock of a listed company.
  • Common stock shares represent ownership in a corporation but without any special privileges, as compared to preferred stock.
  • The benefits of common stuck funds include diversification, simplicity, cost savings, and time savings.
  • Common stock funds have typically been mutual funds but can also include exchange-traded funds (ETFs).
  • Types of common stock funds include broad-based funds and index funds.

Understanding a Common Stock Fund

Common stocks are shares of ownership in a corporation that don't confer any special privileges, such as guaranteed dividends or preferred creditor status. Common stock is classified to differentiate it from preferred stock. Common stockholders are on the bottom of the priority ladder for ownership structure.

In the event of liquidation, common shareholders have rights to a company's assets only after secured creditors, bondholders, preferred shareholders, and other debt holders are paid in full.

A common stock fund is a fund that will invest only in the common stock of companies listed on stock exchanges. Traditionally, common stock funds have been mutual funds, but with the advent of different types of funds, common stock funds can come in a variety.

What is important to pay attention to is the fund's investment objectives and portfolio construction, which are always listed on its website or in its prospectus. This information will convey to an investor exactly what the fund is investing in and how.

Investing in a Common Stock Fund

Investing in a fund that specializes in common stocks can provide cost savings if the fund's loads and management fees are lower than the commissions associated with buying and selling individual stocks. Today, most brokerage firms do not charge a commission for buying or selling stocks on their platforms. Investing in a common stock fund is also a good way to achieve instant diversification, compared with selecting companies individually.

A common stock fund will always be specialized in some way. It might invest in all the companies in the S&P 500, or it might invest only in small-cap tech stocks or mid-cap dividend-paying value stocks, for example. The fund will usually name itself after its specialization and not call itself a common stock fund, because the term "common stock fund" is so broad.

Also, some funds call themselves common stock funds because they invest primarily in common stock (perhaps 80% of the fund's investments), but they might also invest in other types of securities (perhaps 20% of the fund's investments). Investors should look beyond the fund's name and see what it actually holds when evaluating whether the fund is a good fit for their investment objectives.

Types of Common Stock Funds

Index Funds

Index funds are funds that invest in stocks that comprise a specific index. The managers of the fund select the stocks of all of the companies in that index, sometimes with their own adjustments, with the goal of replicating the index's returns. In addition to the S&P 500 index, other popular indexes include the Dow Jones Industrial Average (DJIA) and the Nasdaq Composite.

Broad-Based Funds

Broad-based funds are known for their diversification as they invest in the common stock of companies from multiple sectors and industries. While index funds typically focus on a small number of companies in their portfolio, broad-based funds may include many more companies, sometimes thousands.

Exchange-Traded Funds (ETFs)

Exchange-traded funds (ETFs) are like mutual funds, except that they trade on an exchange like a stock. Many ETFs operate just like mutual funds, so the discrepancy is minimal. Certain mutual funds, however, are more actively managed. The types of ETFs range far and wide and can include index funds, sector funds, or any other type of fund with a specific focus.