When you start investing, choosing the assets to invest in can be daunting. For example, you may wonder whether to invest in ETFs or stocks.
Understanding ETFs and stocks may not happen overnight. But as you continue to invest, you continue learning about the dynamics of each investment and are better positioned to make an informed decision.
However, here are a few pointers toward understanding ETFs and stocks to help you begin your investment journey.
What is an ETF?
An exchange-traded fund or ETF is a type of investment vehicle that tracks the performance of a particular index or group of stocks. They are similar to mutual funds, except they trade on stock exchanges instead of brokerages. ETFs comprise bonds, stocks, or both.
ETFs are becoming increasingly popular because they offer investors exposure to a broad range of assets without investing directly into each asset. In addition, they are cheaper than buying shares of individual companies.
ETFs are the best option for beginners because they solve many problems and can easily earn significant returns. This makes them the perfect starting point for new investors. They invest in stocks from specific focus areas like companies that pay dividends, value-priced stocks, specific industries, and large companies.
They are less volatile and have lower risk, making them safer investments than individual stocks. In addition, ETFs require passive management, and their holdings change only when the underlying group of stocks changes its member companies.
What are Stocks?
Stocks refer to a fraction of ownership in a business, mostly publicly traded companies. Owning stocks in a company means you own a certain percent of the business that is equal to your investment. It also means that you are investing in the business’s success.
Individual stocks are good performers but can be volatile, resulting in massive fluctuation. For instance, it is normal that great-performing stocks can decline up to 50% in a specific year as they await outperformance in the long term. On the contrary, it is normal for high-flying stocks to increase by 50% and more in a year when the market is hot.
Key Difference between ETFs and Stocks
Stocks have a high risk and potential upside, while ETFs have a low or high potential and risk depending on the investment.
Understanding ETFs and Stocks’ Returns
The return in ETFs depends on the performance of the stocks therein. This return is usually a weighted average of the entire ETF’s holdings. The ETF will rise if it owns strong stocks, resulting in attractive returns.
On the other hand, the value of stocks rises and falls in the short term for various reasons. In addition, the market determines the stocks’ performance every day. However, in the long term, the value of stocks is closely related to that company’s growth. The more the company extends its profits, the more the stock rises.
Stocks can be excellent investments in different circumstances, while ETFs may be perfect in others. Understanding ETFs and stocks will help you determine where to start. This information will also help you determine the circumstances that need you to invest in ETFs and those that are perfect for stocks.