ETFs vs. Stocks

A stock is a security or a share which gives investors ownership rights in a company while an ETF is a basket or pool of different securities which may include different stocks or other assets like bonds. ETFs typically track a specific market like FTSE 100.  an investor may own a share of ExxonMobil, an ETF that invests in energy stocks.  

Similarities between ETFs and stocks  

Both ETFs and stocks are traded intraday, that means they are bought and sold throughout the normal trading hours. Unlike mutual funds, ETFs and stocks are transparent in pricing, where their bid-and-ask price quotes and share volume are shown in real-time.  

An investor can also perform all market order ETF types when acquiring the shares or ETF units, as well as short sell both and use options.  

The market order ETF types allow investors to buy shares or ETF units as well as short selling and using options.

Differences between ETFs and stocks  

Stocks carry more risk than ETFs. And ETF is a pool of different securities, where the poor performance of one stock can be offset by the good performing stocks in the underlying ETF. Also, it would be expensive to buy more stocks to get the same diversification as an ETF.

Stocks offer more market exposure in a wide range of industries and sectors for growth and value. ETFs are easier to manage and take less time for research purposes.

Are ETFs better for trading?  

The answer to this question depends on the investor’s risk tolerance and trading strategy. Although, investors with a high-risk tolerance may achieve higher returns through stock investments but stocks also carry higher risks.  

Stock trading can be advantageous if there is a wide dispersion of returns from the mean of the market, while ETFs are more advantageous when the stocks' returns in a sector. Investors should choose ETFs for sectors which include complex technologies such as biotechnology.  

What’s the downside of ETFs?

Like stocks trading, investors pay a commission on each trade execution of ETF. The high trading costs of ETFs eat into investor returns because they lower the overall return on investment (ROI). Some ETFs can have more risky strategies. ETFs typically generate lower dividend yields than individual stocks because their risk profile is lower but there are some ETFs that offer dividend payouts.  

Are ETFs beginner-friendly?

ETFs are an excellent investment tool for new investors since they provide diversified portfolios while keeping costs low. Beginners get the advantage of investing multiple securities through simple management.

Beginners need to scrutinize the holdings of the ETF they choose. Some ETFs expose investors to risky sectors and implement risky strategies like leveraged ETFs.

Are ETFs and stocks correlated?  

It depends on the nature of the underlying assumptions of the ETF; for instance, if an ETF tracks an index, then it will follow that index. Inverse ETFs run in the opposite direction to the index.