The two key options that you have when investing in the stock market are stocks and ETFs. While stocks provide you with a specific percentage of a company, an ETF is a basket of securities that invests across various investments.
In this article, we will explain the difference between ETFs and Stocks.
Stocks and ETFs are great options for making investments in stock markets. But many might find it difficult to understand the difference between them. However, it is crucial to know what differentiates them to make wise investment decisions.
But before understanding the difference, let’s take a look at the similarities-
Both Trade on Exchanges
Exchange traded funds (ETFs) as well as stocks trade on stock exchanges. They are traded during the day.
Investors Get the Option to Invest in Various Sectors
With stocks and ETFs, investors get a wide variety of investment options. Stocks and ETFs allow investors to invest in different companies, industries, sectors, etc.
Investors can Invest in Options
Options are available for various ETFs and stocks. Furthermore, investors can short-sell stocks and ETFs.
They Might Pay Dividends
There are several companies that pay dividends periodically to their shareholders. Many ETFs also receive dividends from stocks that are held, which are provided to investors.
What are the Differences Between Stocks and ETFs?
In order to diversify a stock portfolio, an investor needs to purchase stocks in different companies. This will allow them to keep their portfolio stable while earning good returns.
In case of an ETF, it is a basket of securities. Thus, by purchasing one ETF, they can invest in different companies. Hence, ETFs make it easy for investors to diversify their portfolio.
Risk and Returns
Purchasing stocks can be a very risky option due to wide price swings. Thus, it can lead to huge losses. However, if an investor picks the right stock, then he/she can gain significant returns. Therefore, it is essential to research before making a stock investment.
ETFs invest in a wide variety of companies. Hence, ETFs can lower this risk as losses from underperforming stocks can be offset by gains from better-performing stocks. Therefore, they are a great investment option if an investor wants to diversify their portfolio. While ETFs are a safer option, stocks tend to provide higher returns if the investor picks the right company.
Stocks allow investors to focus on one company that they think can provide significant returns. ETFs provide broader exposure to the investors.
As ETFs invest in a variety of investment options, investors can choose them based on the sector they want to invest in. For instance, an investor can invest in sectors like technology, energy, etc.
In case of stocks, investors must research a company before making an investment. Carrying out this research can be difficult for many investors as they might not know how to analyse a company fundamentally and technically.
ETFs are handled by professional managers. Researching, buying, and selling are done by the managers. Hence, investing in ETFs can be effortless for investors. However, investors need to keep in mind that they must pay an expense ratio as a fee for availing these services.