Active vs. passive

QCan you explain what an “actively managed” mutual fund is? — C.P., Jacksonville, Illinois

AIt’s a typical mutual fund, in that it’s managed by professionals who study and select various investments for the fund, aiming for solid returns.

“Passively managed” funds follow an index or a specified part of the market; each aims to mirror the performance of that index or market subset by holding the same securities in the same proportion. An index fund based on the S&P 500 will hold the 500 or so stocks in that index (or a representative subset). Index funds are passively managed because there isn’t much thinking or deciding for their managers to do.

Interestingly, most actively managed stock funds underperform their benchmark indexes. That’s partly due to cost, as index funds are far less expensive to operate — and they tend to have much lower fees, too. Most of us would do well to have at least some, if not most, of our long-term money in index funds.

You can learn more at Fool.com/how-to-invest, and you can research funds at Morningstar. com.

QWhy do stocks sometimes start trading in the morning at a much higher or lower price than they closed at the day before? — W.R., Lake City, Florida

AThere was probably a development overnight that caused buy or sell orders to pile up all night.

If Scruffy’s Chicken Shack (ticker: BUKBUK) closes at $75 on Wednesday but opens on Thursday morning at $66, it might have posted a disappointing quarterly earnings report, announced the departure of its CEO or been named in a big lawsuit or an investigation by regulators. If BUKBUK opens trading much higher, it might have announced some good news — or perhaps it’s being acquired at a premium price.