If you want to invest in the stock market, individual stocks aren't the only choice. An exchange-traded fund (ETF) might be another option to consider.
The main difference between ETFs and stocks is that a stock represents ownership in a single company, while an ETF is a collection of investable assets and securities, including stocks and bonds. Both can be bought and sold during the day when the stock market is open.
ETFs vs. stocks at a glance
ETFs | Stocks | |
What it is | A basket of stocks that track a specific asset class or index. | A type of security that represents ownership in a company. |
Best if | You want diversification in your portfolio without doing all the work of picking stocks. | You want to pick and choose the companies that make up your stock portfolio. |
Fees | Brokers will charge expense ratios to cover its operational costs. | Though rare these days, brokers may charge commission fees for buying or selling stocks. |
Brokerage firms | |
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Differences between ETFs and stocks
1. Diversification and risk
Since ETFs are a basket of investments bundled together, they offer more diversification and are less risky compared with individual stocks.
A company’s stock value varies day to day. While it’s possible that the stock price could skyrocket, it could just as easily plummet, potentially risking a portion or all of your investment.
2. Cost
Many brokers charge no fees for using their services, or even for buying and selling stocks, which means that you get to keep more of any profits made.
ETFs generally charge expense ratios, which are annual fees you pay to cover a fund's administrative expenses.
3. Research
Investing in ETFs provides the diversification of a mutual fund, saving you the time of researching specific assets for investment.
Investing in stocks, on the other hand, gives you full control over your investment selections — but that also comes with more research. Investing on your own means staying well-informed about a company by studying its management, financial statements, industry news, government regulations and more.
4. Returns
Just like an index fund, an ETF isn’t intended to outperform the market, but track it.
When you invest in stocks, if a company does well, there's potential for higher returns compared with an ETF. But it’s likely that this won’t always happen, especially in the long term.
» Dive deeper: See the best index funds and how to start investing
The bottom line
An investor looking to build a well-diversified portfolio doesn’t have to choose between stocks and ETFs. Instead, understanding the different investment options, tax implications and more can help you build a strategy to meet your financial goals.
You can decide if a portion of your funds should go toward investing in stocks, and another portion should be made up of diversified funds, such as index funds or ETFs.
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