ETF VS Stocks: How do I select?

Author : Quantum AMC | Published On : 07 May 2021

Stocks & ETFs both trade on exchange, but they are two different investment vehicles. When you purchase a stock, you are buying equity of the company, which means you become a shareholder. When you are investing in ETFs you are investing in a fund which is mirroring an index. First let’s understand how each of them works in piecemeal.

Stocks & their Benefits:

Stocks represent ownership in companies. They trade on regulated markets & over-the-counter markets. Stocks give you more degrees of control over your investments and let you invest in and potentially have a say in the management of particular companies. In contrast, ETFs let you track a more extensive market index

When you invest in stocks, you have more control over where to invest. You have the liberty to invest in the business you understand. You can research the company, their business model, their earning history, and their quarterly forecast and then make a sound decision. 

The same would be difficult in an ETF because they replicate the fractional shares of index with a lot of companies. Hence that is beyond your control.

ETF & its Benefits:

Exchange-traded funds are investment vehicles that invest in multiple securities. You can buy and trade them on the markets just like stocks. They are not available over-the-counter. ETF’s seek to replicate the stocks of a particular index.

ETFs are managed passively

Salient Features of Stocks & ETFs:

When you are buying individual stocks, you are owning a particular company but when you buy ETFs, ETFs let you track a broad area of the market because they are replica of respective index. ETF’s are more diversified than individual stock, but they carry expense fees, which a stock does not.

When you are buying individual stocks, you have the flexibility to pick and choose the stocks that fit your financial objectives. You have the liberty to create a portfolio for yourself, including stocks of foreign companies.

Investing in more than one ETF could lead to duplication or over diversification. An ETF that tracks NIFTY 50 and an ETF that tracks technology or IT companies may have many overlaps as they will have several stocks in common.

Costs:

To invest in a stock, you will pay a brokerage charge, for ETF you will be paying management fees in the form of expense ratio of the scheme.

Risk:

When you invest in stocks, you limit yourself to that company’s performance, subjecting your portfolio to a higher degree of risk. By investing in ETFs you allow yourself to keep your investment spread over equities of different companies, thus diluting your risk significantly.

You can't fully predict the difference between an ETF and a stock in terms of returns since nobody can fully predict the market, but you can choose which is suitable for your investment needs.

 

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