ETFs vs stocks: what are the differences?
When investing in ETFs and stocks, you'll consider things like liquidity and your personal strategy. Learn more about the difference between investing in ETFs and stocks.
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Visit help and support for more information.
Call +971 (0) 4 5592108 or email sales.ae@ig.com to talk about opening a trading account.
Contact us +971 (0) 4 5592108
What are the differences between ETFs and stocks?
The difference between stocks and ETFs (exchange-traded funds) is that stocks represent ownership shares in a single company, while ETFs are investment funds that hold a collection of multiple securities, which can include stocks, bonds, commodities, or other assets.
Below is a table on how these financial assets differ depending on whether you trade or invest in them:
Stocks |
ETFs |
| You can trade or invest in a single company like Microsoft | Trade or invest in a collection of different stocks, bonds, or other securities like the iShares Core S&P 500 UCITS ETF |
| When you invest in stocks, you'll take ownership in a company, get voting rights, and earn dividend payments if the company grants them | When you invest in some ETFs, you'll have shareholder rights, and earn dividend payments if the ETF grants them |
| It's relatively risky to get exposure to a single company as your entire outlay could be wiped out if the share price falls | The risk is spread across a number of stocks, bonds or other securities that form part of the fund |
| You can choose to trade or invest in a company that you like | You can choose to trade or invest in a group of markets from a single entry point |
| There's higher volatility when you buy or trade stocks and more liquidity | There's less liquidity in smaller EFTs while larger ETFs experience varied levels of liquidity and volatility compared to buying or trading a single stock |
What is a stock?
A stock is the commonly used collective name for all the shares that a single company lists on an exchange. It’s a financial security that represents part-ownership in publicly traded companies.
Generally, beginners get introduced into the world of investing through following the share price of the brands they love. You can get direct exposure to a company’s performance via the stock exchange.
A company will typically apply to list on an exchange for the purpose of raising capital. Once the application is successful, it’ll make its shares available for purchase to investors via an initial public offering (IPO), special purpose acquisition company (SPAC), or through a direct listing.
With us, you can invest in the stock directly via a stock trading account or trade on the share price rising and falling using CFDs.
When you invest in stock, you’ll buy and hold it with a long-term outlook hoping that the company’s share price will appreciate over time. You’ll pay zero commission on US shares,1 and as little as £8 a month on UK shares. Once you take ownership of the shares, you’ll become a shareholder, have voting rights and get dividend payments if the company grants them.
When trading on stock, you’ll speculate on the share price direction by going long if you think that it’ll rise or go short if you think that it’ll fall.
What are the risks involved with investing in stock?
Since your profit or loss is based on how the company performs, you face the risk of having your entire position wiped out if the share price falls. Some of the factors that cause the share price to fall include operational issues, changes in management, demand and supply and many other business risks.
Moreover, there are external risks that you need to consider that do not involve the day-to-day running of the company, such as market risk, currency risk, climate change, inflation risk, interest rate risk, counterparty risk, liquidity risk and more.
Remember, when you invest, your risk is capped at your initial outlay amount.
What is an ETF?
An exchange-traded fund (ETF) is an investment instrument that tracks the performance of a range of markets like stocks, bonds, indices, sectors, commodities and more.
There are two main types of ETFs available: physical ETFs and synthetic ETFs. With physical ETFs, you track an asset by holding the entire security or a fraction of the constituents that form part of the investment. Synthetic ETFs don’t follow the physical index, but instead, mimic the movement of the underlying market.
ETFs are popular because they enable you to gain exposure to an entire sector or industry from a single position. Additionally, you can build a portfolio that features a diverse range of global markets, suitable to your risk profile.
If you have a long-term investment horizon, you can buy and hold ETFs on a wide range of markets via stock trading. When you have a short-term outlook, you can trade on thousands of ETF markets with us using CFDs.
What are the risks involved with investing in ETFs?
Even though most ETFs have positive returns over a long-term period compared to stocks2 (due to a diverse range of markets in the fund), there are still risks that you need to consider. When investing in ETFs, you’ll experience tax risk, tracking error, political risk and many other specific risks.
While most ETF constituents are made up from different sectors, you seldom find an investment fund that’s focused on a particular industry like technology. In this instance, you’d face market risk, liquidity risk, counterparty risk, climate change and many other risks as a result of the concentration in one market.
Investors that are risk seekers will actively pursue opportunities that bare high risk for the potential of high rewards. While this means that the probability of loss increases, the potential upside tends to be proportional with the high risk involved.
With us, you can invest in thousands of ETFs via our stock trading account. You’ll pay zero commission on US ETFs.1
ETFs vs stocks: pros and cons
ETFs |
Stocks |
|
| Advantages | Diversified risks | Higher potential returns |
| Require little investing expertise | Possible dividends | |
| Possible dividends | Voting rights | |
| Expertly managed | ||
| Disadvantages | Lower returns as it's generally less volatile than stocks | High risks from share price fluctuation and volatility |
| 'Creation and redemption' making it hard to outperform in | Effort required to research and analyse market | |
| Higher transaction fees compared to individual stocks | Pay taxes on any capital gains |
Advantages |
|
| ETFs | Stocks |
| Diversified risks | Higher potential returns |
| Require little investing expertise | Possible dividends |
| Possible dividends | Voting rights |
| Expertly managed | |
Disadvantages |
|
| ETFs | Stocks |
| Lower returns as it's generally less volatile than stocks | High risks from share price fluctuation and volatility |
| 'Creation and redemption' making it hard to outperform individual stocks | Effort required to research and analyse market |
| Higher transaction fees compared to individual stocks | Pay taxes on any capital gains |
Investing in ETFs vs stocks
Here’s a comparison between ETFs and stocks to help you choose which market to invest in:
| Stock | ETF | |
| Risk appetite | High | Low – med |
| Return expectation | High | Low |
| Amount of research or analysis require | High | Low |
| Investing experience | Med – high | Low – high |
| Time requirement for research and analysis | More time needed | Significantly less |
| Market access | 10,000+ shares and ETFs | |
| Market hours | Trade and invest when the market is open and after hours | |
| Volatility | High | Low – med |
Stocks vs ETFs: returns and risks example
Take a look at the performance of Apple shares over a period of ten years and the potential return on investment (ROI) you could’ve earned during that period. Let’s say your initial outlay in January of 2015 was $10,000 with a long-term investment horizon of ten years right through to January 2025.
To calculate the annual return on a ten-year investment, we’d take Apple stock’s share price on 1 January 2015 (29.316) which represents the standard deviation of the portfolio (SP) divided by the expected return of the portfolio (EP) on 20 January 2025 (137.87). Here’s the formula below:
Annual return = 100 x ([137.87/29.316]1/10 - 1)
= 16.74 %
Therefore, over a span of ten years, your investment in Apple stock would’ve now accrued $47,029 Remember that there’s no guarantee that the same growth rate can be sustained for the next ten years, therefore, you need to take steps to manage your risk.
In comparison, you can look at how the Vanguard S&P 500 UCITS fund performed over a 10-year stretch. Let’s say your initial outlay was $10,000 and you invested in the S&P 500 index from 2015 through to 2024. According to our expert analysts, the average stock market return for S&P 500 was 14.8%.
For the first twelve months of your investment, your average return would amount to $1,480 (14.8% of 10,000 = 1,480). Taking into consideration compound returns, you’d get 14.8% of your new total ($10,000 + $1,480) $11,480 to make (14.8% of $11,480) $1,699.04 in your second year.
Investors tend to hold their position for a long time as the relative risk in the ETF market lessen over time. The average returns on major index ETFs have less variance over a period of ten years or more, making it a preferred choice for people with a long-term investment horizon.
Therefore, when choosing to invest in ETFs, you should use money that you won’t need to touch for at least a couple of years to fully reap the benefits of compound returns.
How to start investing in ETFs and stocks
Here’s a simple step-by-step guide on how to start investing with us:
1. Open a stock trading account
With us, you can invest using our stock trading account. This account gives you access to over 10,000 shares and ETFs.
If you’re a beginner, ensure that you have a firm grasp on your asset of choice.
For investors that are familiar with the product offering or already have an account elsewhere, we can assist you in transferring your investment to our account.
2. Choose between investing in ETFs or stocks
You can choose to invest thousands of ETF markets on our award-winning platform3 that include a wide range of sectors, indices, bonds, commodities and more.
Also, you can invest in popular stocks and pay zero commission on US shares1 and only £8 on UK shares.
3. Fund your account
You’ll deposit funds into your stock trading account using any card or bank account that’s registered to you. Some deposit minimums and maximums apply depending on the type of payment method you’ll use.
4. Look for your opportunity
Risk takers are prone to investing in stock because it’s a volatile market and there’s generally deep liquidity. For assuming the risk involved in investing in stocks, you could make a profit if the share price appreciates over time. But you’ll also carry the risk of having your investment wiped out if the market moves against you.
If you’re risk averse, you could search for an ETF, which has a diverse range of markets to spread the risk around. So, if one market experiences a downturn, another security like bonds might have an uptrend on the other end.
5. Open and monitor your investment
Pick the stock or ETF you want to invest in from our full range of markets and set the size of the position. You’ll also need to consider the timeframe you want to invest, choosing between a short-, medium- or long-term investment before you place your order.
With us, you’ll deal shares either ‘at quote’ or ‘on exchange’. If you choose at quote, we’ll facilitate the process to get you the best price available from market makers, and all you’ll have to do is confirm your order.
Alternatively, you can deal shares on exchange, where you’d select an order type and input the price you want to buy or sell at. The price will be added to the exchange’s order book and a willing counterparty will act by accepts it.
FAQs
Is it less risky to invest in ETFs than stocks?
Yes, it’s less risky to invest in ETFs than stocks because share prices tend to be more volatile. ETF funds have multiple constituents, making the risk spread out. If the share price of a single company plummets, you’ll lose your initial outlay.
With ETFs, one constituent’s share price may fall and you wouldn’t lose your investment because other securities may perform better. However, note that both are risky and you’ll need to take steps to manage your risk.
How long should I hold an ETF for?
You could hold onto ETFs for a duration that spans a decade or longer. This is because average returns on major index ETFs have less variance of periods longer than ten years, while the relative risk in the market tends to lessen over time.
How long should I hold a stock for?
You could hold on to your stock investment until your financial goals are realised. The share price fluctuates frequently, so you can hold a position shorter than a day and profit from a change in direction. Alternatively, you can hold on to your position for several years with hopes that your stock appreciates over time.
Are ETFs good for beginners?
ETFs can be good for beginners because they tend to be less risky. An exchange-traded fund comprises of different securities that spread the risk around to ensure that your investment isn’t wiped out if one asset takes a downturn. Beginners that are risk averse can take a position on ETFs that are well-balanced and meet their risk appetite while risk seekers can invest in a fund that focuses on a particular sector to experience high volatility.
Are stocks good for beginners?
Stocks are one of the most volatile markets around, making them less ideal for beginners to start investing in. Further, trading on stocks is riskier compared to investing in them, because you can lose far more than your initial deposit if the market moves against you. When you invest in stocks, your risk is only capped on your initial capital outlay.
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Footnotes:
1 If you place over 50 trades on US shares in a given month, IG reserves the right to charge you $5 per trade.
2 Wealth Desk, 2023
3 Best Finance App, Best Multi-Platform Provider and Best Platform for the Active Trader as awarded at the ADVFN International Financial Awards 2024.
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