An investor is provided withseveral investment options. These include investing in mutual funds, bonds, stocks, and ETFs (Exchange Traded Funds). Investors are often confused between deciding to invest between stocks and ETFs. The difference between an ETF and stock is quite similar to the difference between a whole grocery store and a simple can of soup. When you buy a stock, you tend to invest in a single company — Apple, for instance. When that company performs well, the price of the share goes up along with the value of your investment. However, what happens if it goes down? Nevertheless, to say, it’s disastrous. This article will chalk out differences between a stock and an ETF.
What is a stock?
Also known as equities, stocks are shares of ownership i.e. issued by publicly-traded companies in an attempt to raise capital for the firm. It also provides you with a part of voting rights unless you purchase preferred shares.
What is an ETF?
Exchange-traded funds are a collection of several securities such as bonds, equities, money market instruments, etc., that track an underlying asset class. ETFs are a mashup of diverse investment options. They try to offer the best attributes of two of the most widespread financial assets –stocks and mutual funds investments.
ETFs vs Stocks
The following table lays out the differences between investing in an ETF and a stock:
| ETF | STOCKS | |
| Risk vs potential returns | As ETFs invest in several companies, most of these funds have a built-in diversification. This means that one underperforming asset can be potentially set-off by another overperforming security in the fund. But, this could also lead to limited potential gains. | An individual stock belongs to the high-risk investment options, with potentially wide price swings. The magnitude of losses also tends to increase, if things go south. But stocks have the potential to deliver significantly higher returns than any other types of investment. |
| Cost to diversify | A single security of an ETF fund is a mix of different investments. Thus, an investor can use ETFs to achieve diversification without shelling out too much money. | To get meaningful diversification with stocks, an investor needs to separately buy shares in different companies. |
| Control over investments | ETFs are professionally managed mutual funds based on the goals outlined in the fund’s prospectus. | If you decide to invest in stocks, you have to do all the research and trading on your own. |
| Market exposure | Different types of ETFs provide investors with simple ways to get broad exposure to varying markets. | Stocks make it easy to focus your investment money in a specific company. |
| Types of securities | Several ETFs invest in stocks, but you can also purchase ETFs that invest in currencies, bonds, a mix of bonds and stocks, etc. | A stock is a particular type of investment instrument or security, but there are other important securities as well, such as bonds, etc. |
Remember, there’s no such thing as the optimum investment type. This is because investments do not follow the concept of “One shoe size, fit all’. So investors need to accept that any types of mutual funds will have its pros and cons. Having said that, if you decide to invest in mutual funds online, make sure the fund aligns with your investment portfolio using a mutual fund calculator. Happy investing!
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