Difference Between ETFs and Stocks
5paisa Research Team
Last Updated: 25 Nov, 2024 04:06 PM IST
Want to start your Investment Journey?
Content
- What are Stocks?
- What are ETFs?
- Comparative Analysis of ETFs and Stocks
- Difference Between ETFs and Stocks
- Which Is Better: Stocks or ETFs?
- Decision-Making: Choosing Between ETFs and Stocks
Exchange-Traded Funds - ETFs and stocks are two important investment options for almost every investor. While they both provide potential for capital appreciation, they function quite differently. However, each has distinctive features that can make a big difference in your investing experience. So, what’s the difference, and which one’s right for you? Below is an analysis of each to guide your decision-making.
What are Stocks?
Purchasing a stock means gaining an ownership share in a listed company. The purchaser i.e. the stockholder becomes a partial owner of the listed company. So, if you buy shares of a firm (let's say tech firm TCS), your returns are dependent on the growth of that company. When the stock is increasing you make profits and similarly, if the stock is declining your returns will be negative as your returns will correlate with the company’s financial success. Although these stocks offer investors full control as well as the ability to curate a portfolio, they also carry substantial risk as each investment is dependent on the performance of a single entity.
What are ETFs?
Unlike stocks, an ETF or exchange traded fund is a pooled investment vehicle that aggregates various financial assets, such as bonds, stocks, and/or other securities, into one fund. By purchasing a unit of an ETF, investors gain exposure to a diversified set of assets. A type of mutual fund, they provide a structured way to diversify without investing in each component individually, mitigating some of the risk associated with single-stock exposure.
Comparative Analysis of ETFs and Stocks
Now that we have covered the basic meaning of both ETFs and stocks, let’s analyze them both
Diversification
Stocks: Investing in a stock means single-company exposure. This requires strategic research as well as analysis but limits diversification as the focus is on individual businesses.
ETFs: ETFs provide built-in diversification across sectors or indices, distributing risk across multiple companies and reducing dependence on individual stock performance.
Risk and Volatility
Stocks: Stocks often exhibit high volatility, with potential for substantial gains or losses. This makes them suitable for investors with high-risk tolerance.
ETFs: Due to their diversified nature, ETFs generally offer more stable performance, especially those tracking broad indices. They present a reduced volatility profile, especially in index-linked ETFs.
Cost Structure
Stocks: Stocks are typically subject to one-time transaction fees without ongoing management fees.
ETFs: ETFs incur annual fees, known as the expense ratio, which reflects fund management costs. Though these fees are generally low, they can impact returns over time.
Income Generation
Stocks: Many stocks offer dividends, providing investors with periodic income based on company profits.
ETFs: ETFs holding dividend-paying stocks can also yield dividends. Certain ETFs focus exclusively on dividend-paying assets, providing a more consistent income stream.
Management Style
Stocks: Stock investments provide investors with complete control over individual asset selection.
ETFs: ETFs are typically passively managed, tracking indices or sectors with minimal active involvement. Actively managed ETFs are also available but come with higher fees due to active decision-making by fund managers.
Difference Between ETFs and Stocks
ETFs | Stocks | |
Ownership | With ETFs, you don't own the securities | When you buy stocks, you physically own the security. |
Risk | ETFs are more diversified, so they are usually less risky than stocks | Stocks are comparatively more risky because the investors invest in individual stocks alone. |
Fees | ETFs have slightly higher transaction fees than stocks | Stocks have lower transaction fees than ETFs |
Management | ETFs are passively managed | Stocks are not professionally managed |
Voting rights | ETF holders do not have voting rights | Stockholders have voting rights |
Tax efficiency | ETFs are more tax-efficient than stocks | Stocks are less tax-efficient than ETFs |
Entry position | ETFs can cost as little as the cost of one share plus fees or commissions | ETFs can cost as little as the cost of one share plus fees or commissions |
Dividend yields | Dividend-paying ETFs may not have the same yields as high-yielding stocks | As a stockholder, you get dividends for the stocks you own. |
Which Is Better: Stocks or ETFs?
This depends on your investment goals. Ask yourself: Are you ready to research individual companies? If yes, stocks might suit you. Do you prefer simplicity and diversification? Then ETFs could be your go-to option.
Pros and Cons of Investing in Stocks
Pros:
- Higher Returns: Stocks have the potential to offer huge returns if chosen wisely.
- Direct Ownership: You feel connected to the company’s success.
- Voting Rights: Influence company decisions (for common stocks).
Cons:
- High Risk: If the company performs poorly, you lose money.
- Time-Consuming: Requires constant research and monitoring.
Pros and Cons of Investing in ETFs
Pros:
- Diversification: Reduce risk by spreading investments across various assets.
- Cost-Effective: Lower expense ratios compared to mutual funds.
- Easy to Trade: Similar to stocks, ETFs offer flexibility in trading.
Cons:
- Limited Growth: You won’t see explosive returns like you might with individual stocks.
- Management Fees: Though minimal, these still eat into your returns.
Decision-Making: Choosing Between ETFs and Stocks
For investors looking for diversified, lower-risk exposure, ETF is an efficient option. On the contrary, for investors who are interested in targeted, hands-on investing with higher risk and potential return, individual stocks offer greater control and customization. Many investors opt for a combination of both, utilizing ETFs as a foundation and selecting stocks to tailor their portfolios.
More About Mutual Funds
- What Are Liquidity ETFs? Everything You Wanted to Know
- Why Invest in ETFs Through SIPs?
- Difference Between ETFs and Stocks
- What is Gold ETF?
- Can We Pledge on Mutual Funds?
- Risks in Mutual Funds Investments
- Know How to Transfer Mutual Funds
- NPS vs ELSS
- XIRR vs CAGR: Understanding Investment Return Metrics
- SWP and Dividend Plan
- What is Solution Oriented Mutual Funds?
- Growth Vs Dividend Reinvestment Option
- Annual vs Trailing vs Rolling Returns
- How to Get Capital Gain Statement for Mutual Funds
- Mutual Funds Vs Real Estate
- Mutual Funds vs. Hedge Funds
- Target Maturity Funds
- How to Check Mutual Fund Status with Folio Number
- Oldest Mutual Funds In India
- History Of Mutual Funds In India
- How To Redeem ELSS Before 3 Years?
- Types of Index Funds
- Who Regulates Mutual Funds In India?
- Mutual Fund Vs. Share Market
- Absolute Return in Mutual Fund
- ELSS Lock in Period
- Treasury Bills Repurchase (TREPS)
- Target Date Fund
- Stock SIP vs Mutual Fund SIP
- ULIP vs ELSS
- Long Term Capital Gain Tax on Mutual Funds
- Smart Beta Funds
- Inverted Yield Curve
- Risk-Return Trade-Off
- Registrar and Transfer Agents (RTA)
- Mutual Funds Overlap
- Mutual Fund Redemption
- Mark to Market (MTM)
- Information Ratio
- Difference Between ETF and Index Fund
- Difference Between Mutual Fund and Index Fund
- Top 10 High Return Mutual Funds
- Passive Mutual Funds
- Passive Funds vs Active Funds
- Consolidated Account Statement
- Mutual Funds Minimum Investment
- What is Open Ended Mutual Fund?
- What is Closed End Mutual Fund?
- Real-Estate Mutual Funds
- How to Stop SIP?
- How to Invest in SIP
- What is a Blue Chip Fund?
- What is XIRR in Mutual Funds?
- What is a Hedge Fund?
- Tax Treatment of Long Term Capital Gains
- What is SIP?
- NAV in Mutual Funds
- Advantages of Mutual Funds
- Stocks vs Mutual Funds
- What is STP in Mutual Fund
- How Mutual Fund Works?
- What is Mutual Fund NAV?
- What are Mutual Funds?
- Mutual Fund Cut Off Time
- Mutual Fund the Best Investment Option for Conservative Investors
- Advantages and Disadvantages of Mutual Funds
- How to Choose Mutual Funds in India?
- How to Invest In Mutual Funds?
- How to Calculate NAV of Mutual Fund?
- What Is CAGR In Mutual Funds?
- AUM in Mutual Fund
- Total Expense Ratio
- What is XIRR in Mutual Funds?
- What is SWP in Mutual Fund
- How to Calculate Mutual Fund Return?
- Gold Mutual Funds
- Tax On Mutual Fund Investment
- The Top Benefits and Drawbacks of The Rupee Cost Averaging Approach
- How to Start a SIP Investment?
- What Is SIP & How does SIP Work?
- Best SIP Plans for Long Term: How and Where to Invest
- Best SIP Mutual Fund Plans
- ELSS Vs SIP
- Top Fund Managers in India
- What is NFO?
- Difference Between ETF and Mutual Fund
- ULIPs VS Mutual Funds
- Direct Vs. Regular Mutual Funds: What’s The Difference?
- ELSS vs Equity Mutual Fund
- NPS vs Mutual Fund
- Can NRIs Invest in Mutual Funds?
- Mutual Funds Categorisation In India
- Everything You Need to Know About Small-Cap Funds
- What is Public Provident Fund ?
- What is Large Cap Mutual Fund ?
- What is Index Fund ?
- What is IDCW in Mutual Fund ?
- What is Hybrid Fund?
- What is Gilt Fund ?
- What is ELSS Fund ?
- What is Debt Funds?
- What is an Asset Management Company - A Thorough Explanation
- What are Mid Cap Funds
- Liquid Funds - What are Liquid Funds?
- A Beginner's Guide to Investing in Fund of Funds Read More
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing. For detailed disclaimer please Click here.
Frequently Asked Questions
For new investors ETFs are generally favorable with their built-in diversification. They offer wide-ranging market exposure without requiring to do in-depth company research and analysis. Stocks, however, are suitable to those investors and/or traders who are interested in specific companies and willing to accept higher risk.
Yes, all investments involve risk. Stockholders face direct risk from the performance of individual companies, while ETF holders are subject to market or sector risk, although with mitigated exposure through diversification.
Both stocks and ETFs offer dividends to its investors. However, it depends on the ETF’s holdings or the individual security.
ETFs typically offer lower expense ratios when compared to the costs associated with building a diverse portfolio of individual stocks. However, stock investments come’ without management fees, making them potentially cost-effective for long-term holdings.
Yes, ETFs and stocks are both traded throughout the day on major exchanges. So, they both allow for flexible buying and selling within market hours.
For investors looking for diversified, lower-risk exposure, ETF is an efficient option. On the contrary, investors who are interested in targeted, hands-on investing with higher risk and potential return, individual stocks offer greater control and customization. Many investors opt for a combination of both, utilizing ETFs as a foundation and selecting stocks to tailor their portfolios.