Stocks vs ETFs: what are the differences?

What’s on this page?

1. What are the differences between ETFs and shares?
2. What is a stock?
3. What is an ETF?
4. ETFs vs shares: pros and cons
5. Investing in ETFs and shares
6. How to start investing in ETFs and shares

What are the differences between ETFs and shares?

The difference between exchange-traded funds (ETFs) and shares is that a share is a single tradeable asset, while ETFs track the performance of a range of markets, which could include multiple shares. Below is a table on how these financial assets differ depending on whether you trade or invest in them:

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 share trading or trade on the share price rising and falling using contracts for difference (CFDs).

When you invest in shares through an IG share trading account, you’ll buy and hold the shares with a long-term outlook hoping that the company’s shares will appreciate over time. You’ll pay zero commission on US and UK shares (0.7% FX fee applies),¹ and from just $5 dollars for Australian 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.²

When trading on shares through a CFD account, you’ll speculate on the 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 shares?

Since your profit or loss is based on how the company performs, without building a diversified portfolio, you face increased risk when you're only exposed to a single company. 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 ETF is an investment instrument that tracks the performance of a range of markets like shares, 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 share 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 stocks³ (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 share trading account. You’ll pay zero commission on international ETFs (0.7% FX fee applies).

Investing in ETFs and shares

Here’s a comparison between ETFs and shares to help you choose which market to invest in:

How to start investing in ETFs and shares

Here’s a simple step-by-step guide on how to start investing with us:

1. Open a share trading account
2. Choose between investing in ETFs or stocks
3. Fund your account
4. Look for your opportunity
5. Open and monitor your investment

1. Open a share trading account

With us, you can invest using our share trading account. This investment account gives you access to over 11,000 global markets that include shares, ETFs and investment trusts.

If you’re a beginner, ensure that you have a firm grasp on your asset of choice and the investment account you want to use to get exposure.

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 platform⁴ that include a wide range of sectors, indices, bonds, commodities and more.

Also, you can invest in popular stocks and pay zero commission on international shares (0.7% FX fee applies) and from just $5 dollars for Australian shares.

3. Fund your account

You’ll deposit funds into your share trading account using any card or Paypal, Apple Pay, BPAY or bank account that’s registered to you. With us, we will charge a small fee if you fund your account with a credit card (1% for Visa, 0.5% for Mastercard) or Paypal (1%) but you can make bank transfers, use debit cards and BPAY free of charge.

Depending on the type of payment method you’ll use, you need to ensure that you meet the minimum deposit. When using credit or debit card, you’ll need at least $500, while there’s no minimum deposit for a bank transfer.

4. Look for your opportunity

Risk takers are prone to investing in shares 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 of losing your investments if the market moves against you.

Alternatively, you can search for any ETFs that have a diverse range of markets to spread the risk around. You can choose an ETF to ensure that if one market experiences a downturn, another security like bonds may 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 trade 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.

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