If you are thinking about investing, or are looking at different types of investment products, you have several instruments to pick from. There are stocks, mutual funds, bonds, currencies, and exchange traded funds available in the market today. All investors want their investments to grow. Every investment instrument will bring with it a unique choice and characteristics. The trick is to choose a product that fits your investment portfolio in the most appropriate manner. It might be difficult to decide what to invest in – especially between ETFs and stocks. You need to understand the differences and characteristics of etf stocks to make a well informed decision that is in alignment with your investment goals.
Stocks are also known as equities, and they are shares of ownership issued by organizations in an effort to raise funding. Security is an asset that can be traded in part or whole and an asset is anything of value that you own. A share of stock gives you a part of voting ownership in the company.
When you invest in shares of small companies, they are known as penny stocks. The trading of penny stocks is considered to be speculative and very risky. A common stock will allow you to vote in the shareholder meetings. It might also pay a part of the annual profits to investors known as dividends. The value of a stock share changes according to the company, the structure, financial performance, economy and other important factors.
Exchange Traded Funds
An exchange traded fund or ETF is a professionally managed investment portfolio. A manager will buy the stocks, bonds, commodities or other securities and will create a basket of different funds. The funds in the basket are your holdings and a fund manager will sell shares of the holdings to the investors. In managing the fund, the manager will purchase or sell parts of the holdings to keep the fund in alignment with your goals. The value of stock and ETF will change throughout the trading day and it should not be concerning for a long term investor.
ETFs pay a part of their earnings to investors. It is possible to find ETFs that focus on one industry, bond, currency or a country. You will also find inverse funds in the market. These funds tend to move in a different direction of the market and they help hedge the risk of the portfolio. An inverse ETF does carry the same level of risk. They can hedge against the down market but if the stock rebounds, an inverse ETF can decline in value as fast as they had increased. It means they are not suitable for long term investments.
Risks of Stocks and ETFs
There are several factors that affect an investment. Investments can be volatile and they come with a risk of inflation. If you compare the two, an ETF has low risk because it is a mini portfolio and is diversified to a certain extent. It also depends on the type of companies or industries you have invested in.
The IRS will access taxes on the income earned in the form of dividend. If you make a profit when you sell the stock or ETF, you pay a capital gain tax. You can deduct the losses up to a point to offset the total value that capital gains are measured against. Dividend will be considered an income. You cannot deduct any commission or fees you paid at the time of making the investment.
Control and flexibility
If you want more control on your investment portfolio, you need to opt for stocks. You can choose the stocks to invest in and you can liquidate them whenever you want to. However, you need to have knowledge of the movement of the stock market and an understanding about the implication of the market ups and downs. If you do not want a hands on approach towards managing your investment portfolio, leave it to the professionals by choosing an ETF.
Similarities between stocks and ETF
- ETF and stocks both are taxable,
- They can be purchased on a margin and sold short,
- They generate a stream of income,
- There are hundreds of options,
- They can be traded on the market throughout the trading day.
Which one should you invest in?
If you are looking to create a steam of income through your investment, you need to build a portfolio of stocks that carry a regular dividend. Many companies increase their dividend each year and these companies are known as dividend aristocrats. ETFs can also create income streams with their holdings. However, ETFs are considered to be safer as compared to stocks. They offer better average gains and are less volatile. Stocks are more volatile because they are based on the economy and the global situations.
Both investment products are similar in terms of low risk and high or moderate return models. Before you choose to make an investment, you need to consider your personal risk appetite and decide which is better for you. There will be fees applicable in both the cases and they both provide an income stream. Your investment decision should be based on the level of risk associated and your investment goals. There is no sure shot way of getting an investment right, it varies from one individual to another.