When you invest in the stock market, you have a few options for how to get started. You can begin with a mutual fund, which typically has a smaller initial investment and requires much less maintenance than stocks or ETFs.
However, if you’re willing to put in more time and effort, stocks and exchange-traded funds (ETFs) give you greater growth potential. These two types of investments are similar in that they’re both securities that track particular indexes or sectors.
The main difference is how they are traded. Stocks are primarily sold through the third-party services of brokerages, while ETFs can be bought directly from their issuer on an exchange like an individual stock.
While there isn’t necessarily one correct answer for everyone when it comes to investing your money, understanding each type of security can help inform your decision as an investor.
So, if you’re wondering ‘what are ETFs and stocks’ and ‘how do these two securities differ’, keep reading for our guide on everything you need to know as a newbie investor.
What Are ETFs and Stocks?
Stocks are securities that represent partial ownership in a company. When you purchase one, you become a shareholder of that company, and you get an equitable share of any profits from the business.
The value of the stock will also increase based on the company’s performance, so you can also sell your stock at a future date and make a profit from it.
If you purchase stock directly from the company, you can choose to receive physical stock certificates. More commonly, you will buy stocks through a brokerage, where they will be kept in your account as a paper entry. In either case, you can sell your stocks at any time and transfer the money you receive to your bank account.
What About ETFs?
An exchange-traded fund (ETF) is a type of fund that holds a collection of assets, such as stocks or bonds. The fund will track the performance of a certain index, like the S&P 500 or the NASDAQ 100, so that the value of your investment will increase or decrease based on the performance of those securities.
When you buy an ETF, you’re purchasing shares of the fund, just like you would with stocks. The fund will then buy the underlying securities and hold them in trust until you sell your ETF shares. Unlike with stocks, you don’t get a portion of the company or have shareholder rights against the company. Instead, you’re simply holding shares in the ETF fund and receiving a portion of any profits the fund makes from buying and selling the underlying securities.
You can purchase ETFs directly from their issuers on an exchange, though you’ll likely need a brokerage account.
How Are Stocks and ETFs Different?
Stocks and ETFs let you invest in the stock market without owning any actual companies. Instead, stocks allow you to purchase partial ownership in a specific company. If you want to buy shares in a specific company, you’ll need to purchase its stock.
ETFs are funds that track a specific index. So, for example, an ETF that tracks the S&P 500 will hold the same 500 stocks that make up that index. While stocks are traded between investors, ETFs are traded between investors and their fund managers.
The ETF fund managers will buy the stocks that make up the index and hold them until an ETF replaces them.
Summing It Up
Investing in stocks and ETFs is a great way to grow your wealth over the long term. You can do that by diversifying your portfolio and putting in the time and effort needed to keep track of your investments.
While there isn’t necessarily one right answer for everyone when it comes to investing your money, understanding how both securities differ can help inform your decision as an investor.