Difference between ETF and Stocks
You already saw the difference between Exchange Traded Funds and Mutual funds. Now, let us focus on the difference between ETF and stocks.
Investors have many choices to invest in to grow their wealth in today’s day and age. The list is virtually unending when investing in stocks, bonds, mutual funds, ETFs, etc.
Investors want to see investments grow; thus, each has many advantages and disadvantages.
Retail investors can choose from stocks and ETFs. Both are available for trading on the stock market. The stock offers ownership in a single firm; an ETF gives you a basket of securities depending upon the type of ETF.
Thus, ETFs provide access to virtually any part of the financial market. ETFs are collections of stocks, bonds, commodity derivatives, and other investments traded on an exchange.
What is the similarity between ETF and Stocks?
- ETFs and stocks are taxable upon redemption.
- Both offer a steady income.
After applicable tax deductions, some stocks pay dividends to the investors’ accounts. Similarly, the assets underlying the ETFs also generate dividends and returns, either invested back into the fund or given back to the investors after proper deductions.
There are various sectors to choose stocks and ETFs from. Similar to stocks, ETFs can also be traded on the stock exchange.
Difference between ETF and Stock?
ETFs are a group of securities packaged as a unit and listed on the exchange. These assets need not be only stocks but can be any security.
Fund managers who own the underlying securities manage these ETFs.
The concerned investors of the ETFs do not own the underlying assets directly and hence give no ownership and voting rights.
Stocks listed on the exchange offer ownership and voting rights (if they are not preferencing shares) in a single company. Preference shares are the shares that give the investor a promised return at the cost of forgoing voting rights in the AGMs.
ETFs are managed by a professional, thus saving you the trouble of deciding which securities in the underlying assets of the ETF to sell or hold. In the case of stocks, investors need to be very vigilant in the market to know when to buy, sell, or hold.
In the case of ETFs, investors do not control what happens to the portions of the ETFs. ETFs have a diversified profile of assets, the risk associated with the investment reduces significantly.
In stocks, the risk attached is higher as the stock price depends entirely upon the company’s performance and other exogenous (outside the control of the person in question) factors of the world.
The liquidity of a stock is way higher than the liquidity of an Exchange Traded Fund. However, in rare cases, the latter can have higher liquidity than the former.
The bottom line is that every investment decision should be backed by the study of the risks involved. The investor should keep his risk profile in mind before proceeding.
Most importantly, the strategies and goals of the investor are vital when choosing the securities. The right for one might not be the right choice for the other.
Keeping these fundamental similarities and differences in mind helps in better decision-making.
Consult our Financial Advisory Expert to discuss the right plan for you.