ETF and Stock are two of the widely-used terms when it comes to the world of investments. Thus, if you are just about to start investing, you may be curious about their difference.
As I said earlier, both the ETF and Stocks are investment vehicles you can take. However, you need to understand some critical differences before choosing one over the other.
ETF vs. Stock: The significant differences
Accordingly, six significant factors make these two different from each other.
Among these are risk vs. potential return, the cost to diversify, market exposure, research and legwork, control over investments, and types of securities. Let's get into each of these differences!
Risk vs. Potential Return
The risk and potential returns pertain to the possibility of earning a great profit and losing your investment.
When it comes to stocks, the risk of investment is high because it's a single investment. It means that you're putting your total assets in a particular stock.
If things go wrong for that company, you'll lose all your investment. At the same time, however, it can also be a door to a more significant potential return if you picked the right company.
The thing about an ETF is that it offers diversification. It merely means that your money gets spread in a pool of stocks, and not just in a single one.
Thus, if a company crashes, you only lose a little bit of your investment. The downside is that it offers limited potential gains than the stocks.
Cost to diversify
As I said earlier, diversification means having your investments pooled to different stocks. Thus, it is a win for the ETF since it's own structure already offers diversification.
To get meaningful diversification with stocks, you have to buy shares in many different companies separately.
With this, it will cost you less if you choose an ETF over the stocks.
Market exposure refers to the amount of money an investor has invested in a particular asset.
Stocks make it easy to focus on a specific company that you believe is worthy of investing.
ETFs, however, offer investors simple ways to get broad exposure to many markets. The downside is that you can't use an ETF to focus on a single firm.
Research and legwork
Research and legwork are also some things you should consider, especially if you're starting and only have basic knowledge about investing.
If you go for stocks, you have to do all the research and trading yourself. While some investors won't mind it, others find it time-consuming and difficult.
ETFs run on a passive management system. Thus, it runs based on the goals outlined in the fund's prospectus. In simple terms, all the work of researching, buying, and selling individual stocks gets done for you.
Now, it doesn't mean you won't do any thinking at all. Of course, you must decide which ETFs you should get, so you still need to research.
Control over investments
Many people prefer having control over their investments, while some don't mind as long as it runs smoothly.
If you opt for the Stock, you make decisions about where your money goes. You decide where you put your money and which company you'll invest in as you go on.
ETF investors don't have that luxury, as their funds get managed by the managers. The managers do all the work of researching, buying, and selling individual stocks.
Types of securities
When it comes to the types of securities, you can say stocks are one form of it.
A stock is a particular type of security or investment instrument. Thus, going for supplies means having only one kind of protection.
ETFs also invest in a stock, but other than that, they also invest in bonds, a mix of stocks and bonds, currencies, commodities, etc.
In simple terms, you will have many types of securities with an ETF, if that's what you chose.
When it comes to potential returns, stocks offer a better option to investors. It applies to those who wouldn't mind taking on more significant risks. Further, it's more of a trust in a particular company that you believe is worth the investment.
On the other hand, ETFs provide excellent alternatives to those who don't want to put their investments at high risk. Moreover, it's also a perfect option for investors who are just starting with smaller budgets.
In the end, you need to remember that while these two have pros and cons, it doesn't mean you should pick one over the other.
As an investor, you may consider getting in your portfolio both stocks and ETFs simultaneously.