loader2
Partner With Us NRI

Open Free Demat Account Online with ICICIDIRECT

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.

Disclaimer: ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Mumbai - 400025, India, Tel No : 022 - 2288 2460, 022 - 2288 2470.  AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds and all disputes with respect to the distribution activity would not have access to Exchange investor redressal or Arbitration mechanism.

Please note that Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. I-Sec does not assure that the fund's objective will be achieved. Please note. NAV of the schemes may go up or down depending upon the factors and forces affecting the securities markets. Information mentioned herein is not necessarily indicative of future results and may not necessarily provide a basis for comparison with other investments. Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

The information provided is not intended to be used by investors as the sole basis for investment decisions, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific investor.The contents herein above shall not be considered as an invitation or persuasion to trade or invest. Investors should make independent judgment with regard suitability, profitability, and fitness of any product or service offered herein above. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.

Most Popular

  • 13 May 2022
  • ICICI Securities

The Five-Point Financial Planning Checklist For Your Family

Whether you just got married or planning to have a baby or have dependents, you should have financial plans for every stage in your life to ensure a secured future for your family members. Here are five things you can do financially for your family.   

  • 12 May 2022
  • ICICI Securities

What is a Zero Coupon Bond?

You get fixed returns in the form of interest until maturity when you invest in a bond. Zero-coupon bonds work a little differently. In this article, find out what zero-coupon bonds are, their advantages and whether you should invest in them. 

  • 12 May 2022
  • ICICI Securities

What are Cross Currency Pairs?

The forex market is the largest financial market globally. Currency trading is a lucrative and booming business. While most currencies trading happens in relation to the US Dollar, some don’t. That forms the basis of cross currency pairs. Here’s what you need to know about it. 

  • 12 May 2022
  • ICICI Securities

Investing principles from Benjamin Graham: The Father of Value Investing

Benjamin Graham was a British born economist, professor, and investor who taught at Columbia University. He was also a mentor to some of the most famous investors of the 20th century, including Irving Khan, John Templeton, & Warren Buffett. Buffett called him "the second most influential figure in his life, only after my father". 

  • 12 May 2022
  • ICICI Securities

How to Invest in Nifty 50?

The Nifty 50 is the benchmark index of the National Stock Exchange. It represents the 50 largest companies listed in India. Investing in the Nifty 50 can be a good idea for those looking to make index-linked returns. Here’s how you can invest in the index. 

  • 12 May 2022
  • ICICI Securities

Investment philosophy of Cathie Wood: The most powerful woman on Wall Street

Catherine Duddy Wood, also called Cathie Wood, is an investor who primarily invests in disruptive technologies and is the founder, chief executive officer, and chief investment officer of ARK Investment Management, LLC, an investment management firm mostly active in the United States.

  • 11 May 2022
  • ICICI Securities

How to Use Technology to Improve Your Finances

Technology has made life simpler for everyone. In the realm of personal finance, technology has streamlined many processes—from budgeting to automating your payments. On National Technology Day, let’s look at how technology has transformed our finances. 

  • 11 May 2022
  • ICICI Securities

How to Invest in your Every Goal with Mutual Funds?

Each of us is unique. We have different needs and goals in life. Some of us can ride along swinging markets, while some may need a relatively conservative investment tool. 

  • 11 May 2022
  • ICICI Securities

Four Reasons Why Entrepreneurs should Invest in Equity Mutual Funds

Equity mutual funds provide growth opportunities not just for individual investors but also for entrepreneurs and corporates. They make excellent investments for anyone looking for wealth creation. This article will give you four reasons why businesspeople should consider investing in equity mutual funds.