What is stock and an ETF?
To understand the difference between ETF and stock, you need to understand what these two instruments mean.
When a publicly listed company wishes to raise funds for its venture, it issues stocks, also known as shares, on stock exchanges such as the Bombay Stock Exchange. Depending on how many individual stocks you own, you have a certain percentage of ownership in that company. Also, if you buy preferred stock, then you are not eligible to vote in the company’s decisions but get preference over those holding common stock when it comes to receiving dividends of the company’s profits. There are thousands of listed companies on the market in whose stock you can invest.
While stocks are just one instrument, an ETF is a basket of securities consisting of diversified investments such as stocks, commodities, bonds, and other securities. These funds are called holdings. The shares to these holdings are then sold to investors by the fund manager. In India, ETFs first arrived on the investment scene in 2001. Today, there are several ETFs in India from which to choose.
ETF vs individual stocks
Before you consider the points for stock vs ETF, remember that they hold significant similarities.
1. Both are taxable
2. Provide an income stream
3. Offer hundreds of options
4. Can be bought on a margin and sold short
5. Both can be traded on the stock market throughout the trading day.
Let’s take a look at the significant differences between stocks and ETFs:
1. Investing in an ETF is associated with lower risk as it is diversified. You are investing in a portfolio of different entities, and it is unlikely that all of them will lose their value. On the other hand, investing in individual stocks can be riskier, especially if you put all your eggs in one basket. If the company loses its value, then your stock’s value falls, and there is no other investment instrument to nullify that loss.
2. ETFs require a professional to manage the investment for you, whereas investing in stocks doesn’t necessarily need a broker. You can do your research and build a robust portfolio.
3. An ETF has a higher transaction fee compared to when you buy individual stocks. However, the expense ratio and broker fees are usually lower for ETFs.
4. Your ETF is managed by a professional saving you the trouble of deciding which portions of the ETF to sell or hold. In the case of individual stocks, you will need to keep an eye on the market to know when to buy, sell, or hold. Inversely, in the case of ETFs, you do not have control over what happens to the portions of your ETFs; while in stocks, you have control over what stock selection.
Just like any other important aspect of your life, investing also depends on your research, personal preferences, and the guidance of someone experienced. You will have to put in a reasonable amount of effort to identify your financial goals and understand your appetite for risk. For professional guidance, take the help of an advisor or broker to help you choose the best investment options to secure your future.