If you’re getting started investing, you might wonder whether it’s better to invest in stocks or ETFs. Well, the answer depends. Stocks can be a great investment in some circumstances, while ETFs can be better in others. But for new investors, exchange-traded funds solve many problems, and they’re an easy way to earn attractive returns — so they’re a great starting point.
Here’s all you need to know about stocks vs. ETFs and when it’s best to use each one.
Differences between stocks and ETFs
Stocks and ETFs are similar in some ways, not surprisingly, since ETFs often contain many stocks. Despite their likenesses, they’re fundamentally different and present various upsides and risks.
A stock represents fractional ownership interest in a business and typically trades on an exchange, in the case of a publicly traded company. When you own a stock, you’re investing in the success of that company — and only that company.
In the short term, stocks may rise and fall for many reasons, and market sentiment often determines how a stock performs day to day. In the long term, however, a stock more closely follows the company’s growth. As the company expands its profits, the stock will tend to rise as well.
Individual stocks can perform phenomenally over time, but they may be volatile in the short term, fluctuating massively. It’s not unusual for high-flying stocks to decline 50 percent in a given year on their way to long-term outperformance. On the other hand, a strong stock might go up 50 percent or more in a single year, especially if the overall market is hot.
ETFs are collections of assets, often stocks, bonds or a mix of the two. A single ETF might own dozens, sometimes hundreds, of stocks. So by owning a single share of the ETF, investors can own an indirect stake in all the stocks (or other assets) held by the fund. It’s a great (and often inexpensive) way to buy a collection of stocks.
ETFs often invest in stocks that have a specific focus area, for example, large…
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