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Would You Rather Invest Your Money In a Startup or an Established Company?

written by: Bobby Ivie•edited by: Jean Scheid•updated: 6/14/2011

Sometimes the riskiest investments can be the most rewarding, and other times they can, well, take us to the bank. If you have the stomach for the risk, investing in new companies can line your pockets in grand fashion. If not, you should probably stay with the masses in a safe mutual fund.

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    saving and investing in equity investments and mutual funds Sometimes there are so many options it is hard to know what to do about investing. Quite often, talking with people and reading about it leads to more confusion. Every investor has his own ideas and formulas for successful investing. However, when it comes to investing in company startups as opposed to mutual funds, the choice becomes more clear.

    The choice is clearer because it practically involves two different kinds of investors. Private equity investments are usually very big investments made by the biggest players. Mutual funds are for all investors from beginners to the very wealthy.

    Private Equity Investments

    Private investors who see potential in a new company make these investments. Their hope is to fund a startup company that has potential for great returns. These investments do not always mean you need to invest a lot, some are as low as only $25, and in return, the investors will own a large percentage of the company.

    This affords the new company the opportunity to grow in hopes of going public. When it goes public, everyone can buy stock in the company. That allows the company to grow even more. The money the company uses from the sale of stock to expand is the equity investment. This is money from public investors, as opposed to a private equity investment, which is money from private investors.

    Concisely, private equity investments are very large and risky investments made by an investor or a group of investors to help a company launch.

    Mutual Funds

    Mutual funds buy stocks in several companies at the same time. This is to reduce risk and increase the potential for profit. If a company the mutual fund invests in goes bad, it will not hurt the portfolio much because there are, hopefully, other companies in the portfolio that are doing well.

    Most mutual funds do not require a large up-front investment. In fact, with automated funding for retirement investments, many require only a few dollars per month.

    A big company that offers investing in mutual funds, like Vanguard, Fidelity or T. Rowe Price, will have a variety of funds: growth funds, bond funds, index funds, etc. This gives an investor the opportunity to changes funds if they do not like the way one is performing.

    What is the Main Difference

    Mutual funds require a lot less investment to start. They offer less risk, and usually, the ability to move money into other funds.

    Private equity investments usually require a large up-front investment. The risk is much higher than that of mutual funds, and once invested in a startup company, an investor is in it win, lose or draw. However, the rewards can be exceptional.

    Knowing these differences, indeed, makes the choice clearer. Private equity investments are for highly experienced investors with deep pockets. Mutual funds are for the rest of us. If you want the best of both worlds, consider a mutual fund that focuses on small business and growth. It is not the exact same thing, but it is less risky and can still be very rewarding.

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