Mutual funds are collections of stocks, bonds, and other financial securities mutually (jointly) owned by a group of people. Thus, when one purchases one share of a mutual fund, one is effectively purchasing, for example, 0.03 shares of Intel, 0.05 shares of Exxon, $3.00 of a 30-year U.S. Treasury bond, and 2.34 shares of Stockmaster.
Most mutual funds frequently buy and sell stocks and bonds so, even though you may still own one share of the same mutual fund, it know could now represent 0.4 shares of Compaq, 0.03 shares of Dow Jones, and 2.34 shares of Stockmaster. When the mutual fund company sells some securities for a higher price than it originally paid for them, a capital gain occurs. If it sells for a lower price, a capital loss occurs. A stock or bond owned by the mutual fund may also pay a dividend , that is, cash paid by the stock or bond. Distributions consist of capital gains, capital losses, and dividends paid to mutual fund shareholders.