Stocks versus ETFs: Which Should Investors Choose?
If you invested $1,000 in Apple (AAPL) ten years ago, your investment would be worth $7,000 today. Not bad, right? However, knowing how much, when, and where to invest is a million-dollar question. In playing the markets, every single decision can make the difference between a loss and a profit.
And the fact that there are so many products to choose from doesn’t make it any easier. Should you turn to stocks, exchange-traded funds (ETFs), index funds, mutual funds, or bonds? Each one of these investment options comes with its own benefits and disadvantages. That’s why weighing them carefully is essential for making the right decision.
It’s also crucial to bear in mind that there’s no definitive answer as to which one of these options is best. The answer depends on what your goals are. There’s no one-size-fits-all if you’re serious about investing—although most people nowadays observe investments only from the perspective of their 401(k). But that’s a shift from investing to retirement.
In this article, we’ll discuss actual investing. I’ll explain the differences (and similarities) between stocks and ETFs to help you build your portfolio.
Investing in stocks
When you buy a stock, you’re practically acquiring a share of a publicly traded company. This means you’re the owner of a small piece of that company—as well as its earnings and assets.
Companies decide to sell shares to raise cash for different reasons. They might want to propel further growth, purchase equipment, or acquire another business to expand.
Stocks are also called equities. And in some cases, investors—that is, stock-owners—can have their say during shareholder meetings. They can also receive dividends—regular, usually annual, payments distributed from the company’s profit or earnings.
When it comes to the way investors make money out of the stock they buy, it’s pretty straightforward. When the value of the stocks they acquired goes up, they can sell them for more than they purchased them. However, this doesn’t mean the process of investing is straightforward.
There are numerous risks associated with investing. One example is the possibility that a company will go out of business or lose value. It’s true that you can have control over your investment to a certain extent, in the sense that you can vote and influence the company’s business activities.
Also, if you’re experienced in a particular sector and research the company you want to invest in well, then you can reduce the volatility of your investment, mitigate risk, and achieve better returns.
Finally, stocks allow you to invest in companies of your choice. You can purchase them individually, which gives you greater flexibility. Stock exchanges such as the Nasdaq or the NYSE are where stocks trade.
Investing in ETFs
Exchange-traded funds mainly differ from stocks. They’re professionally managed, pooled investment vehicles.
ETFs purchase all kinds of securities—including commodities, stocks, and bonds, thus creating a basket of securities that can later trade on an exchange, similarly to stocks. An ETF can, for example, follow an index, country, currency, or industry sector when purchasing securities.
In other words, many ETFs are so-called index funds. And that means they track different market indexes—such as the S&P 500 (SPY) or the Dow Jones Industrial Average (DIA). This is why you can’t have much control when it comes to ETFs. You don’t have any influence on the composition of the tracked indexes.
The price of ETF shares fluctuates throughout the trading day. These movements are based on the same factors that apply to stocks.
Usually, a professional manages these shares. So investors make their money from the profit after a fee or commission for the manager.
ETFs aren’t exactly perceived as challenging or exciting among some investors. Their returns are mainly average. But that doesn’t necessarily have to be a bad thing! As a matter of fact, it’s the consequence of their being safer than stocks, which tend to be more volatile.
So, if you aren’t exactly into risk-taking, then ETFs might be a slightly better option for you. With these funds, investors make money if the value of their fund increases, meaning that they can sell their shares and make a profit.
Here are other factors to take into consideration before you choose one of these options.
Ease of transactions
Generally speaking, stocks are easy to buy and sell. All it takes is either calling your broker or create an online account and trade. It’s also possible to purchase stocks directly from the issuer.
On the other hand, you can only buy or sell ETFs on exchanges. But if you have a brokerage account, the procedure is as simple as investing in stocks.
Having a mobile investment app is a good idea, too. They usually come with useful features such as investment coaching and market data. And all of these features can really smoothe out the entire investing process. Moreover, with a skilled agile development team, it would even be possible to build your own investment app.
Liquidity is the speed at which you can sell your stocks or ETF holdings and obtain cash. If this factor plays an important role for you, then it’s good to know that ETFs aren’t exactly as liquid as stocks. But it all depends on the quality of the products in the basket, as well as a particular fund’s trading volume. Stocks win in this category.
Still, only blue-chip stocks can trade almost instantly. What are blue-chip stocks? They’re the stocks that boast both high quality and financial stability.
In contrast, penny stocks take days or weeks to trade. These stocks might seem like a good idea if you don’t have a lot of money to invest since they trade at a price of under $5 per share. But be warned: their liquidity is questionable.
Usually, companies that are recovering from bankruptcy or still new issue penny stocks. So be very careful if you decide to opt for this solution.
A level of risk: Stocks versus ETFs
As we’ve already mentioned, stocks are considered to be more suitable for risk-takers. On the other hand, ETFs are more diversified. That’s because they’re a basket of different investments. And as such, their risk is lower.
However, it’s worth mentioning that risk also depends on the type of ETF. For example, oil, gas, and energy ETFs are considered to be as risky as individual stocks in the industry. That’s why many investors choose to invest in household names such as Exxon Mobil (XOM) or Chevron (CVX).
If we’re talking about the oil sector, volatility is something that always looms on the horizon. Another thing to bear in mind is that if you choose a long-term approach, you shouldn’t forget to factor in external factors such as different regulations, sanctions, and global conflicts. All of these influences can affect the price.
My conclusion is that investing requires a tailored approach. In other words, the best way to invest is to weigh your options by staying informed and diversify your investment portfolio.
Want to learn more about investing? Check out A Trader’s Guide to the Commodities Market and How to Invest in Cryptocurrency: A Beginner’s Guide.