ETFs Vs Stocks - Difference

Introduction

Sunny is in his early 20s, wants to explore investment opportunities. So, he asks his friend Shreya, an expert investor, for advice before investing in stocks. Shreya gives him the suggestion to look for ETFs, too, as they are an excellent option to consider for investment. Now, Sunny wants to know what is the difference between ETF and stock. So, this is how Shreya explains to Sunny. Read on.

What is Stock?

Stocks, also commonly referred to as shares, are issued by the company when they wish to raise funds for the company. When buying a stock, you are investing your capital into one single company. You can purchase multiple individual stocks of the company. The stock price rises when the company is doing good, and you can sell the stocks to reap investments. But when the company isn't doing good, the price falls, resulting in a loss.

Additional read: ICICI Direct- Equity investments

What is an ETF?

An ETF (Exchange-Traded Fund) whole is a basket of securities like stocks of a particular type of companies like companies from a sector such as an infrastructure or Government companies. ETFs can also consist of a combination of securities like bonds, stocks, commodities and others. All these securities in the exchange-traded fund are called holdings. The fund managers sell these holdings to the investors. An ETF is like a market as a whole where you won't be required to select the stocks going up and then invest.

ETFs vs Stocks

1. Risk

In stocks, the ratio of your investment risk is pretty high as the stock is bought from a single company. As the company performs poorly, that company's stock price will fall, incurring a loss for you.

When buying ETFs, the capital is invested in multiple securities. For example, there are several bonds, stocks, and commodities in a single exchange-traded fund.  And there are no chances of every security losing its value. Hence, an ETF is less risky. 

2. Fund Manager

When you want to buy stocks of a company, you don't use the services of a professional fund manager. Usually, you just select the stocks according to your research about the company's prospects. However, this may lack a professional touch, which is helpful when investing in multiple companies' stocks.

On the other hand, the exchange-traded fund is managed by professional fund managers. First, the fund managers buy the basket of securities as per the mandate of the ETF and later sell it to the investors. Second, the managers who operate the fund ensures that the stocks in their given proportions are maintained at all times. 

3. Control Over Funds:

As mentioned, ETFs are bought and sold by fund managers, which also relieves an investor to look out to which stocks to buy and sell. Everything will be calculated by the fund managers and decide which stocks to sell or buy, saving you time.

But if you intend to buy individual stocks, you will need to do all the calculations. It would be up to you to decide when to buy, sell or hold a stock. Individual stock gives you control over them, unlike the ETF. 

4. Liquidity

Liquidity is a term used for referring to how easily your investment can be converted into cash. The stocks are liquidated depending on the company issuing the share. If it is a high-quality stock, the corporation should be financially stable to liquidate the stocks.

The ETFs can be liquidated similar to stocks, i.e. you can buy and sell the units of ETFs at will. It may be remembered, the trading volume of the ETF's components are generally of high-quality stocks, meaning they are highly liquid. Therefore, it may be said that it is comparatively more accessible for you to convert the ETF into cash.

Similarities ETFs vs Stocks

In the debate of the difference between ETF and Stock, we may also note that both share similarities.

• Both Exchange-Traded Fund and Stock are taxable on similar lines
• Both can be traded all day long on the stock market during the trading hours of the stock exchange
• Both can be bought on a specific margin and later sold short

Conclusion

Exchange-Traded Fund and Stocks are different and yet have some similarities. Both are viable options for an individual according to their expertise. A person who has less expertise in the stock market for investments can opt for ETFs, and the one who knows how to read the mood of the stocks in the stock market may want to buy stocks of individual companies. Also, take the guidance and advice from experts before investing. It will help you to choose as per your circumstances.