A Beginners Guide To Understanding Stocks and ETFs
When you think of investing, you probably think of buying a house or a condo. After all, that’s where the majority of your parents and friends invest their spare cash. But there are many other ways to invest money for the future.
Stocks and exchange-traded funds (ETFs) are two types of securities you can use to grow your wealth over time. While both stocks and ETFs can be beneficial when it comes to investing, they have some significant differences that make one better than the other depending on your goals and risk tolerance.
This article will make understanding stocks and ETFs a lot easier so you can decide which one is right for you.
Understanding Stocks: An Overview
A stock is a type of investment that gives you partial ownership of a company. Stocks come in different “classes” — common stock, preferred stock, or convertible security.
Stocks are “risky” because there’s always a chance that the company will go out of business or that the stock price will decrease. If the company goes bankrupt, you may lose all (or most) of your investment. On the other hand, if the company is successful, you may make a lot of money on your investment. Stocks are “liquid” because you can quickly sell your shares and convert them back into cash through an online brokerage account.
Understanding ETFs: An Overview
An ETF (Exchange Traded Fund) is an investment that tracks the price of a specific index (e.g., the S&P 500 or the NASDAQ 100). ETFs are baskets of stocks or bonds similar to mutual funds but trade like individual stocks because there is no minimum investment requirement.
ETFs are less risky than stocks because they track an index and don’t rely on any one company’s success as stocks do. If the index goes down, the ETF will also decrease by a smaller amount. However, it’s important to note that ETFs don’t guarantee you’ll make any money. You should always look at your investment goals before investing in stocks or ETFs.
Differences Between Stocks and ETFs
Stocks are equity, while ETFs are debt. This means that you’re owed a percentage of the company’s profits when you own stocks. When you own an ETF, you’re not owed anything; you’re simply loaning the ETF money to receive returns on the investment.
Since ETFs are a form of debt, they’re regulated by the government. This is why they have lower risk than stocks. On the other hand, the government does not regulate stocks and therefore have a higher risk. Additionally, stocks are considered riskier because each company has a different amount of risk. Some companies are more stable than others, and some industries are riskier than others. .
Stocks are more liquid than ETFs because you can sell them anytime. You can also cash out your investments with stocks more quickly than ETFs.
Another key difference is that stocks are more expensive than ETFs since they require a broker. Most brokerages charge a fee to buy and sell stocks. ETFs, however, are much cheaper to purchase because they don’t require a broker.
The Bottom Line
Stocks and ETFs are both types of investments you can use to grow your wealth over time.
Stocks tend to be a better investment for people willing to take on more risk in hopes that their investments will grow quickly. ETFs are a better investment for people willing to take less risk and are looking for a consistent source of income.
So, If you’re thinking about investing in stocks or ETFs, consider your goals, risk tolerance, and where you can get the best returns.