ETF vs Stock – Which One is the Better Investment Option?

Investment decisions today require more thought than ever before. There are many options in the market, but the right choice depends on investment goals, risk tolerance, and current economic conditions. Recently, due to volatile market conditions, investors have been interested in building safe and diversified investment portfolios. In such an environment, it has become important to know which option, ETF or  stock can prove to be better in the current times.

In this blog, we will compare ETF and stocks as investment options and decide on which one is best, along with their advantages and disadvantages.

What is an ETF?

ETFs or exchange-traded funds are investment instruments that represent a mix of shares of several companies, bonds or other assets. They can be bought and sold on the stock exchange like a common share. The biggest advantage of investing in an ETF is that it is diversified – that is, investments are made in several companies or sectors simultaneously, which reduces the risk. Apart from this, it is easier to trade as they can be bought and sold throughout the day in the stock market at market prices.

Know More: Calculate returns on ETF investments.

There are several types of ETFs, such as:

• Equity ETF: which invests in stocks of several companies.
• Debt ETF: which invests in government or corporate bonds.
• Gold ETF: which tracks the price of gold
• Sectoral/Thematic ETF: which invests in a specific sector (e.g. IT, banks)
• International ETF:  which tracks foreign markets.

ETFs can be a better option for long-term investors, especially when low risk and stable returns are preferred.

Read Also: How to Invest in ETFs in India – A Beginner’s Guide

What is Stock?

Stocks are a part of the investment world that gives investors an opportunity to directly take a stake in a company. When an investor buys shares of a company, he becomes a small owner of that company. This ownership makes him a partner in the company’s profits, losses and other important decisions.

Investing in stocks has the potential to deliver good returns, but it also carries a higher risk, as a company’s financial performance can have a direct impact on the share price and thus your investment. Market movements, economic conditions and the company’s internal strategy can affect stock prices.

There are many types of stocks, such as:

• Blue-Chip Stocks: Large, stable, and reliable companies
• Mid-Cap and Small-Cap Stocks: Fast-growing but relatively more risky companies
• Growth Stocks: Companies which have the potential for rapid expansion
• Dividend Stocks: Companies which regularly distribute a share of profits with its shareholders.

With all these options, it is important to start wisely in the stock market.

ETF vs Stock: Key Differences

When it comes to ETFs vs Stocks, there are fundamental differences between the two investment options and selecting between the two is impacted by the investor’s experience, goals, and risk appetite. Here are some key differences between the two that can help you make a better decision:

Parameter	Exchange traded Fund (ETF)	Stocks
Diversification	The investment is divided among many companies, so ETFs are well-diversified.	Your investment performance  is dependent on a single company’s financial performance, which keeps the risk more concentrated.
Risk and Volatility	ETFs are less volatile, especially index-based ETFs.	Depends on the performance of the company, hence volatility is high.
Management	Most ETFs are passive, which do not require much monitoring.	Research and tracking are important while investing in individual stocks.
Liquidity	ETFs have high liquidity.	Some Stocks are directly affected by the performance of the individual company.
Ownership	Buying an ETF gives you ownership of units of ETF, not of a specific company.	Buying stock gives you a direct stake in the company concerned.
Expenses and Fees	It has a small expense ratio and brokerages and transaction charges apply.	Brokerage and transaction fees are charged.
Voting Rights	ETF holders generally do not have voting rights in companies.	Stockholders have the right to vote on company decisions.

It is clear from this comparison that both stocks and ETFs have their own strengths and limitations. While ETFs are about instant diversification, stocks offer the potential for higher returns.

Pros and Cons of Investing in ETFs

Pros of ETF	Cons of ETF
Having multiple stocks in a single ETF provides diversification, which reduces risk.	The potential for high returns is limited.
Low expense ratios, making them especially beneficial for passive investors.	The investor does not have complete control to decide which stocks to include.
A good option for the long term as there is no need for constant buying, selling and research.	Some thematic or sector ETFs may be more volatile.
Easy way to invest in international markets, gold, bonds etc.	Less popular ETFs may have higher buy-sell spreads, which increases costs.

Pros and Cons of Investing in Stocks

Pros of Stock	Cons of Stock
Investing in the right company can provide good returns in the long term.	Poor performance of the company may result in a sharp decline in the value of the investment.
Shareholders get ownership and voting rights in the company.	The risk is higher compared to ETFs because there is less diversification.
There is a possibility of getting returns from both dividends and capital gains.	Company reports, market and sector information have to be constantly monitored.
You have complete control over your investments in stocks, buy or sell whenever you want.	Price volatility is high, which may cause stress or confusion among new investors.

Stocks or ETFs: Which is Better?

Which is better between ETFs vs Stocks depends entirely on the investor’s preferences and strategy. If your investment goal is stable growth and low risk over the long term, ETFs are the preferred investment option. They offer instant diversification at low cost, which is beneficial for beginner investors.

On the other hand, if an investor understands the market movements, has the time to do research, and wants the higher returns, then investing in individual stocks is a better option. However, investing in individual stocks can be risky and one has to face higher volatility.

Common Mistakes to Avoid While Choosing Between Stock and ETF

Common mistakes made while investing in stocks and ETFs are mentioned below:

• Making decisions based only on short-term returns: Many investors invest only by considering the recent performance or chart patterns and ignore long-term potential and risk. Whether it is a stock or an ETF, it is important to pay attention to future growth along with the tracking error in the ETF and past financial performances for stocks.
• Ignoring expense ratio and fee structure: Investing in ETFs incurs fees known as expense ratio, which can affect returns over time. At the same time, frequent trading in stocks can increase brokerage charges.
• Overlapping in portfolio: Investing in both ETFs and stocks is good, but at times investors invest in the same company through ETFs as well purchase their shares, which reduces diversity and increases risk.
• Investing on Unverified Investment Tips: Investing on the advice of a friend, social media or an influencer without understanding your financial situation and goals can be risky. Conduct your own research or speak to a financial advisor before investing in ETFs and stocks.

Conclusion

Both ETFs and stocks have their own advantages and risks. While ETFs come with lower risk, diversification, and less effort, stocks offer more control with the potential for higher returns.

Deciding which option is better depends on the investor’s risk appetite, financial goals, and availability of time. It is important to evaluate your financial position and goals before investing. With the right strategy and information, good returns can be obtained from both the options.

Frequently Asked Questions (FAQs)