A mutual fund pools money together from thousands of small-time investors and then its manager buys stocks, bonds, or other securities with it. When you contribute money to a fund, you get a stake in all its investments. That's a big deal: Since most funds allow you to begin investing with as little as a couple thousand dollars, you can attain a diversified portfolio for much less than you could buying individual stocks and bonds. Plus, you don't have to worry about keeping track of dozens of holdings -- that's the fund manager's job.

The price for a share of a fund is determined by the net asset value, or NAV, which is the total value of the securities the fund owns divided by the number of shares outstanding. If a mutual fund has a portfolio of stocks and bonds worth $10 million and there are a million shares, the NAV would be $10. A fund's NAV changes every day, depending on the price fluctuations of the fund's holdings.

The NAV is the price at which you can buy and sell shares, as long as you don't have to pay a sales commission, or "load." If you're buying directly from a fund company such as Fidelity or T. Rowe Price, you don't have to worry -- loads come up only when you buy from a broker, financial planner, insurance agent, or other adviser.