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Relations and Misconceptions

ETFs vs. Stocks

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June 28, 2024
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A stock is a security that represents partial ownership of a company. Meanwhile, while an ETF is a basket of different securities—which may include different stocks or other assets like bonds. For example, an investor may own a share of ExxonMobil, or own an ETF that invests in different energy-related stocks. 

Similarities between ETFs and stocks 

Both are traded intraday, meaning that they are bought and sold throughout the normal trading hours. They are also price transparent, where their bid-and-ask price quotes and share volume are shown in real-time, unlike mutual funds. 

An investor can also perform all market order types when acquiring the shares or ETF units, as well as short sell both and use options. 

Differences between ETFs and stocks 

Stocks tend to be riskier than ETFs. An ETF is a basket of different securities, where the poor performance of one stock can be offset by the good performance of the many other stocks in the ETF. Also, it would be costly to buy several to gain the same diversification as an ETF. 

ETFs offer market exposure in a wide range of sectors, and specific strategies such as growth and value. ETFs also offer easy management and are less time consuming on the research side. 

Are ETFs better for trading? 

It depends on the investor's risk appetite and strategies; however, it is safe to say that stocks can offer higher returns for investors with a higher risk appetite. Stock trading can be advantageous if there is a wide dispersion of returns from the mean of the market, while ETFs are more advantageous when the stocks' returns in a sector have a narrow dispersion from the mean. ETFs can be a wise choice when it comes to a sector with complex technologies, for example, the biotechnology industry. 

What’s the downside of ETFs?

Like stock trading, investors pay a commission on each execution for an ETF trade. Those costs might be high, reducing an investor's return on investment (ROI). Also, some ETFs can have more risky underlying strategies. Although there are ETFs that provide dividends, the dividend yield tends to be be lower than that of a solitary stock, given the lower risk of ETFs.   

Are ETFs beginner-friendly?

ETFs are beginner-friendly when it comes to investing, as they can provide diversification at a relatively low cost. Beginners can get the benefit of investing in various securities in an easy-to-manage way. 

However, beginners should scrutinize the ETF’s holdings. Some ETFs might be tied to risky sectors or employ risky strategies, such as leveraged ETFs. 

Are ETFs and stocks correlated? 

It depends on the nature of the underlying assumptions of the ETF; for example, if an ETF mimics a specific index, they will move in tandem. However, if it's an inverse ETF, it would move in the opposite direction. 

Disclaimer: The content published above has been prepared by CFI for informational purposes only and should not be considered as investment advice. Any view expressed does not constitute a personal recommendation or solicitation to buy or sell. The information provided does not have regard to the specific investment objectives, financial situation, and needs of any specific person who may receive it, and is not held out as independent investment research and may have been acted upon by persons connected with CFI. Market data is derived from independent sources believed to be reliable, however, CFI makes no guarantee of its accuracy or completeness, and accepts no responsibility for any consequence of its use by recipients.