What are stocks?
Stocks represent fractional ownership in a publicly traded company. As the value of the company goes up or down, so does the value of your shares. They can be bought and sold easily through many brokerages.
Advantages of stocks
Higher returns: You may see higher returns when you invest in individual stocks. These returns aren’t guaranteed, of course, but many investors do see growth in their portfolios.
Values-based investing: You can invest in companies that you believe in.
Highly liquid: For publicly-traded companies, you’ll be able to trade them almost anytime you want.
Disadvantages of stocks
Less diversification: Ownership of individual stocks creates a less diverse portfolio and may be subject to market and industry volatility.
Time commitment: Investing in individual securities requires active trading. Even with buy-and-hold strategies, you need to make trades yourself and take time to understand your investments.
Taxes: Gains made on your stocks may be subject to taxes, especially if you hold them for less than a year.
No guaranteed returns: Investing in individual stocks doesn’t guarantee you’ll see a return.
What is an ETF?
An exchange-traded fund (ETF) is a pool of investments you can own by investing in shares of the fund. It’s like buying an album with the best hits of the 90s, as opposed to buying the albums of each artist of the 90s individually.
There are many types of ETFs, which can provide a wide range of investment strategies. Fees are generally low and offer investors easy diversification.
Advantages of an ETF
Simplicity: ETFs are easy to buy. Investors don’t need to be as involved as they are when they’re investing in individual stocks.
Instant diversification: When you buy shares of an ETF, you’re buying a part of all the investments in it. You get instant diversification.
Inexpensive to own: Many ETFs have low fees because they’re not often actively managed like most mutual funds are.
Many ETFs to choose from: There are ETFs for every kind of investor and every type of investment. You may see commodity ETFs, bond ETFs, dividend-paying stocks ETFs, S&P 500 ETFs, and many more.
Tax-efficient: ETFs have a tax-efficient redemption process and fewer sales within the fund, resulting in fewer taxable events.
Disadvantages of an ETF
Slower growth: ETFs may grow more slowly than individual stocks.
Market risk: ETFs typically have significant market exposure, which inherently entails risk.
Bid-ask spread: You may need to account for an ETF's bid-ask spread, which can increase the total cost.
Less control: You won’t have the ability to pick and choose the individual investments held within an ETF.
What are the similarities between stocks and EFTs?
As investments, stocks and ETFs share several similarities, as outlined in the chart below.
| Stocks | ETFs | |
|---|---|---|
| Transparency | High: Holdings and pricing are publicly available. | High: Holdings and performance are disclosed. |
| Investment options | More than 59,000 stocks are listed globally to invest in. | More than 12,000 global ETFs are available to invest in. |
| Pricing | Don’t carry a management fee and have low or zero trade fees. | Low management and trade fees. |
| Trading | Can be bought and sold throughout the day. | Can be bought and sold throughout the day. |
| Dividends | May pay dividends. | May pay dividends. |
Transparency
Both stocks and ETFs offer high transparency. Holdings, performance, history, and pricing details are fully disclosed.
Investment options
There are many stocks and ETFs to invest in. Worldwide, there are more than 59,000 stocks listed on international exchanges and more than 12,000 global ETFs.
Pricing
Pricing for trading stocks and ETFs differs, but both are low-cost. Many brokerages don’t charge fees for buying stocks, nor do they charge a management fee. ETFs may be bought commission-free. There is a management fee, but it’s typically very low since ETFs are generally passively managed.
Trading
Both ETFs and stocks can be traded throughout the day on a wide variety of brokerage platforms.
Dividends
Both stocks and ETFs can distribute a portion of their profits as dividends.
What are the differences between stocks and EFTs?
Stocks and ETFs differ in many ways, as outlined in the chart below.
| Stocks | ETFs | |
|---|---|---|
| Diversification | Must diversify yourself. | One share of an ETF instantly diversifies your portfolio. |
| Research | Must do the research and due diligence yourself. | Must decide which ETFs to buy, but within each ETF, the investment research is done for you. |
| Management | Must complete trades on your own. | Professionally managed. |
| Capital gains | The individual controls when capital gains are realized by selling at their discretion. | May distribute minimal capital gains because the fund is bought and sold instead of the individual securities within the fund. |
| Types of securities | A stock is one type of security. | ETFs invest in a wide range of securities. |
Diversification
Stocks don’t offer immediate diversification as ETFs do. You’ll need to buy a large number of stocks to get the kind of diversification that an ETF has. An ETF, on the other hand, already has underlying investments that create instant diversification.
Research
The difference in the amount of research you need to conduct with a stock vs. an ETF is substantial. As ETFs are professionally managed, the investment management team conducts research on the underlying investments. When you invest in individual stocks, the responsibility is all yours.
Management
ETFs are passively managed by a portfolio manager, which means there are few changes throughout the year to keep the individual investments aligned with the fund's objectives. There’s even less effort required of the investor, who can simply buy into the fund. Compare that to an investor of stocks who needs to be very hands-on with the research, market movements, and day-to-day trading decisions.
Capital gains
Capital gains, and the taxes you pay as a result, are different when it comes to stocks and ETFs. ETFs are structurally tax-efficient. An ETF doesn’t trigger capital gains because the underlying investments aren’t sold when the ETF is bought or sold. Capital gains for a stock, on the other hand, can be triggered when you sell shares and realize a gain. Of course, this also depends on what account you hold stocks in and how long you’ve owned the stock.
Types of securities
A stock is only one type of security, whereas an ETF can hold many types of securities. ETFs can hold stocks, bonds, currencies, commodities, futures, and more.
Stocks vs. EFTs: What is right for you?
You don’t have to choose between investing in stocks vs. ETFs - you can do both.
However, as there’s a clear difference between the two, when you’re constructing a financial plan and an investment strategy, you’ll need the right pieces in place.
Some considerations to help you make your decision:
Stocks give you ownership in a single company: If you already have an investment portfolio and want to add a greater share of a particular company you like, you could invest in stocks.
Stocks give you more control: Investors have more control over their investments with stocks.
Stocks are more volatile: Picking and choosing your investments can create more volatility in your portfolio.
ETFs are low-cost. If you’re great at index investing, ETFs are for you. You can do the research yourself and buy into the fund with a single transaction.
ETFs are easy to trade: ETFs are tradeable any hour of the day and highly liquid. You likely can get out as soon as you want to sell your investment.
ETFs are low maintenance: Since ETFs track an index, fund managers don’t make as many trades as mutual funds. You may invest in the fund, forget it, and it’ll likely still grow.
The bottom line
Professional advice from a qualified financial advisor can help you decide how to invest your money. There are many decisions to make and strategies that can help you set yourself up for success.
Get matched with a financial advisor from Unbiased today and get your money questions answered.