Legal Definitions - common-stock fund

Common-Stock Fund

A common-stock fund is a type of investment fund, often structured as a mutual fund, that primarily invests in the common stock of various publicly traded companies. Common stock represents ownership shares in a corporation, giving the holder a claim on a portion of the company's assets and earnings, and typically voting rights. By pooling money from many investors, a common-stock fund allows individuals to own a diversified portfolio of stocks managed by professionals, without having to purchase individual shares directly.

Here are some examples of how a common-stock fund might be utilized:

• Example 1: Retirement Savings for a Young Professional

  A 30-year-old software engineer, Sarah, wants to invest for her retirement through her company's 401(k) plan. She chooses a common-stock fund that focuses on large-cap U.S. companies. This fund allows Sarah to invest in a broad range of established businesses, such as technology giants and consumer goods manufacturers, without having to research and buy individual stocks. Over several decades, she hopes to benefit from the long-term growth potential of these companies.

  Explanation: Sarah's choice illustrates a common-stock fund as a vehicle for long-term wealth accumulation. The fund provides diversification across many companies' common stocks, managed by experts, which is ideal for someone with a long investment horizon like retirement planning.

• Example 2: Funding a Child's College Education

  David and Maria are saving for their newborn daughter's college education, which is 18 years away. They open a 529 college savings plan and decide to allocate a significant portion of their contributions to a common-stock fund that specializes in growth stocks. This fund invests in companies expected to grow at an above-average rate, such as innovative biotech firms or emerging market leaders. They are comfortable with the higher risk associated with growth stocks given their long investment timeline.

  Explanation: This example shows a common-stock fund being used for a specific long-term financial goal. By investing in a growth-oriented common-stock fund, David and Maria are leveraging the potential for significant capital appreciation from a diversified portfolio of common stocks to meet future educational expenses.

• Example 3: A University Endowment's Investment Strategy

  The investment committee for a university's multi-billion dollar endowment fund decides to allocate 15% of its portfolio to a global common-stock fund. This fund invests in common stocks of companies located across different continents and industries, including developed and emerging markets. The goal is to achieve broad international diversification and capture growth opportunities from various economies worldwide, while also generating some dividend income to support the university's operations.

  Explanation: Here, a large institutional investor uses a common-stock fund to achieve global diversification and long-term growth. The fund provides exposure to a wide array of international common stocks, managed professionally, which helps the endowment balance risk and return across its vast portfolio.