An investor is offered various investment options. Some different types of investment include investing in mutual funds, stocks and ETFs (Exchange Traded Funds). Investors are often confused between deciding to invest in ETFs and stocks. The difference between an ETF and stock is similar to the difference between a whole grocery store and a can of soup. When you purchase a stock, you tend to invest in a single company — Samsung, for instance. When that company performs well, the price of the stock goes up along with the value of your investment. However, what happens when it goes down? It’s disastrous. Let’s understand what a stock and ETF is.
What is a stock?
Commonly known as equities, stocks are shares of ownership issued by companies in an attempt to raise funding for their firm. It gives you a part of voting ownership unless you buy preferred shares.
What is an ETF?
Exchange-traded funds are a collection of various securities such as shares, bonds, money market instruments, etc., that track an underlying asset. ETFs are a mashup of different investment options. They offer the best attributes of two of the most popular financial assets – mutual fund investments and stocks.
Reasons why investments in ETFs are better than stocks:
Following are some of the reasons why investments in ETFs are better than stocks:
- It requires lesser due diligence
Investments in stocks require proper due diligence. This is where ETFs have the edge over a stock. Investments in ETFs would mean that investors can spend their time thinking about which markets and sectors are poised to perform and make investment choices without being bogged down by excessive initial and ongoing due diligence. - Might be a cheaper investment option
When you compare ETFs to mutual funds or stocks, ETFs can prove to be cheaper to own and trade. Several brokerage houses now offer a variety of ETFs that can be traded commission-free, giving investors a cost advantage over stocks and mutual fund investments. Many ETFs, especially index fund ETFs have lower annual expenses than most mutual funds in general and are cheaper to hold. - Instant diversification
ETFs offer instant diversification as compared to individual stocks. Investors often find it challenging to own a diversified portfolio with 10 inidividual stocks. On the other hand, holding the same number of ETFs is relatively simple. - No minimums
While it’s possible to search a quality mutual fund with substantially low initial investment requirements, exchange-traded funds have no such requirements at all. If an investor has a sum of money to invest and has an account that provides free ETFs, it’s possible to put that amount to work immediately. Similarly, there are no minimums for subsequent investments and no minimum “maintenance” amounts.
Remember, there’s no such thing as the perfect investment, so investors need to accept that any investment option will have its pros and cons. Happy investing!