Future Business Leaders of America (FBLA) Agribusiness Practice Test

How do mutual funds work?

1. Investors buy shares of stocks directly

2. Investors pool money together to invest in various securities

3. Investors individually select bonds to purchase

4. Investors avoid diversifying their assets

The correct answer is: Investors pool money together to invest in various securities

Mutual funds operate by pooling money from multiple investors to create a larger collective fund, which is then used to invest in a diversified portfolio of securities, such as stocks, bonds, or other assets. This approach allows investors to access a wide array of investments that they might not be able to afford individually, promoting diversification and potentially reducing risk. By pooling resources, mutual funds enable investors to participate in a broader market segment, and professional fund managers typically manage the investments, making decisions based on market research and analysis. The concept of pooling resources is fundamental to mutual funds because it allows smaller investors to benefit from the expertise of seasoned managers and achieve economies of scale that individual investors would find challenging to replicate. This makes mutual funds an attractive option for many investors looking to diversify their portfolios without the need to directly manage individual investments.