Funds or stocks?

Q: Are mutual funds safer to invest in than stocks?

B.B., Newton, Mass. A: They can be. A mutual fund spreads its assets across a range of investments, such as stocks, bonds or cash. That diversification can make it less risky than having your money in only a few holdings because if a holding that makes up 20% of your portfolio implodes, it will do more damage than if the holding was one of 200 in a mutual fund in which you’re invested.

Mutual funds come in all shapes and sizes, though, and some are riskier than others. For most investors, low-fee, broad-market index funds, such as ones that track the S&P 500, are a terrific choice — offering solid long-term growth and reasonable risk. Riskier funds include those focused on a volatile industry or region and those that invest in derivatives or employ leverage.

If you choose to invest in individual stocks, you can reduce your risk by keeping up with their progress.

Q: I understand that when a company reports bad news, many investors might sell their shares. But who buys them?

G.R., Bellevue, Wash. A: Think of the stock market as an auction, where stocks trade at prices that buyers are willing to pay and sellers are willing to accept. So if there’s some bad news out about the Home Surgery Kits Co. (ticker: OUCHH), many shareholders may sell. The stock price will drop, because few people will want to buy shares at the prelawsuit price, believing the company is worth less. As the price falls, at some point it will start to look attractive to some investors, who will buy.