ETFs Vs. Stocks: The Differences to Know

June 1, 2022

Areej M Alturki
Founder, Nakla

The discussion over ETFs vs. stocks is undoubtedly one of the most heated topics in the world of investing. To pick amongst ETFs and stocks, one must first comprehend the qualities of both ETF and individual stocks. Both ETFs and individual stocks are traded on stock markets, but they differ in terms of risk factors, the number of securities, etc. 

Let’s deep dive into both terminologies and understand the similarities and differences between them.

ETF Vs. Stocks Overview

What is a stock?

A stock showcases a proprietorship share in an organization. A publicly listed organization releases shares of stock for the foremost time via an initial public offering. When a corporation goes public, it simply means that its shares are accessible for purchase and sale on a stock exchange. A ticker symbol identifies every traded stock.

Stocks can also be called equities. When you purchase one or more shares of stock, you are acquiring an equity position in the underlying corporation. The worth of that equity might grow or decline with time as the stock's share price rises or falls.

Publicly listed firms can issue shares of preferred stock or ordinary stock. Preferred stock does not provide stockholders the right to vote, but it does provide periodic dividend distributions with time. Dividends on ordinary shares can also be paid. However, the quantity and timetable are not specified. Investors who possess common stock, on the other hand, have voting rights.

What is ETF?

An exchange-traded fund (often known as an "ETF") is a collection of equities. Hundreds, if not millions, of different equities can be included in a single ETF. However, certain ETFs merely own a few equities.

ETFs, unlike stocks, are not produced by a single firm. The majority of ETFs are formed by financial institutions such as brokerages. Initially, a brokerage firm buys all of the equities that will be included in the fund. Every stock in the portfolio will pay dividends and potentially even interest.

The brokerage then offers ETF shares to investors. You will get a piece of the ETF's returns as an ETF investor. That may appear to be a substantial amount of money, but keep in mind that ETFs sometimes have multiple other investors with whom you will be dividing earnings. However, you may always purchase more ETF shares to boost your income.

Like stocks and other forms of assets, ETFs are traded on stock markets. To begin trading, just create an account with a brokerage firm.

Similarities between ETF and Equity

ETFs and stocks have numerous characteristics in common. Let's have a look at them:

Tax Implications

The Internal Revenue Service will levy dividend payments from equities and exchange-traded funds.

If you profitably trade a stock or ETF, you must pay capital gains tax. The term capital gains refer to any increase in value over the amount you spend for the security. Losses can be subtracted up to a certain level to help offset the total value upon which capital income is calculated.

Both offer a Wide Range of Investment Options

Both financial instruments can be used to invest in a wide range of sectors, businesses of all sizes, and marketplaces all over the world.

Income Streams

Your dividend-paying equity portfolio is most likely a consistent source of revenue for you. Many companies transfer profits to their stakeholders. Some have been demonstrated to increase their payouts every year. These stocks are referred to as "dividend aristocrats."

ETFs can possibly create income streams through their assets. Mutual funds frequently invest a portion of the value in bonds, which are debt securities offered by businesses and governments. They will divide the proceeds from such investments to stakeholders after deducting expenses.

May Pay Dividends

Many businesses pay dividends to the shareholders on a regular basis, which constitute a percentage of the company's profits. Likewise, ETFs may earn dividends from the equities in which they invest, which are then distributed to ETF shareholders.

Trading Mode

Both exchange-traded funds and stocks are bought and sold in the open market at the time of market hours. Users can trade these investment items during any time of the day at an available cost, reaping intraday trading benefits.

Liquidity

ETFs and equities are two of the most liquid financial vehicles accessible. Given the present state of the market, buyers can quickly liquidate their assets.

Income Source

Buyers have an exclusive right to income in dividend form from ETFs and stocks. Though some shares offer their holders preferred dividends considering the nature of stock, investors owning ETFs are also eligible for dividends on their underlying securities as and when announced by the firm.

ETFs Vs. Stocks: The Visible Differences

Now that you have read the similarities, let’s have a look at the differences between ETF vs. Equity.

ParametersStocksETFs
Risk Vs. Probable ReturnIndividual stocks are a heavy investment, with potentially significant price movements and the threat of big losses if the business fails. However, if you choose the appropriate firm, a stock might give larger returns.ETFs offer considerable built-in diversity because they invest in dozens of firms. This implies that other, higher-performing equities may counter an insufficient operating stock within the fund. However, this may restrict possible advantages.
DiversificationTo achieve the necessary diversity, an investor must select a large number of equities.ETFs, provide investors with a broadly diversified portfolio of wealth in the form of a separate unit.
LiquidityThe type of equities influences liquidity. Equities of high-performing blue-chip businesses will be highly liquid, but stocks of middle-cap or small-cap corporations may be less liquid.The liquidity of ETFs is determined by the index they monitor as well as their portfolio. An ETF with a basket of blue-chip businesses and a significant trading volume will have strong liquidity.
Market ExposureStocks allow you to concentrate part of your investing funds on a firm you trust, such as one that is incredibly well-managed or creative.The many forms of ETFs provide investors with straightforward options to gain broad access to diverse markets. Most ETFs are intended to mirror the performance of indexes like the S&P 500.
Control Over FundsIf you want to purchase new stocks, you must perform all of the computations. It is up to you to determine when to purchase, sell, or keep stock. Unlike ETFs, individual stocks offer you power over them.Fund managers purchase and sell ETFs, which spares investors the responsibility of determining which equities to buy and sell. The investment managers will evaluate everything and select which equities to sell or purchase, sparing effort.
Types of SecuritiesA stock is one sort of security or financial product, but some other significant securities include notes.Most ETFs invest in the stock market, but you may also trade in bonds, a combination of stocks and bonds, commodities, and other essential items. Several securities can provide additional diversification.

Conclusion

While ETFs are commonly referred to in the same color as stocks, other aspects are considered when deciding between individual equities and ETFs. Risk tolerance, investment cost, and investment budget are essential considerations in such a crucial decision. In order to make a significant investment selection, investors must be informed of the characteristics and differences between the two investment products and have a robust market analysis.

FAQs about ETF Vs Stock

Is it better to buy stocks or ETFs?

It depends on the investor as to what they wish to trade, whether ETFs or Stocks. If they possess knowledge in buying and selling stocks, they can try to buy stocks as it will help them gain huge profits. On the other hand, if they are not ready to take a massive risk, they can proceed with ETFs.

Are ETFs riskier than stocks?

Investing in an ETF has a lesser risk since it is diversified. You're investing in a spectrum of various businesses, and it's improbable that they'll all lose value at a time. Simultaneously, the individual stock investment might be trickier, particularly if you put all your funds under one roof.

Stay Updated with the Latest Trends

Create an account for free and get started instantly.

Now, what to wait for, it’s time to put your funds to work today.

Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.