Breaking Down Stocks vs. ETFs
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Investing means putting your faith into the marketplace. You can buy into specific companies, or you can choose funds that are making their own mark. One of those types of funds is an exchange-traded fund (ETF). What's the difference between individual stocks vs. ETFs?
What it means to buy a stock
When you purchase a single stock, you're buying a share of a specific company. Examples include blue-chip companies like Apple as well as alternative brands like Nio Inc.
You trade shares by using a ticker symbol, which is unique to the company.
What it means to buy an ETF share
An ETF is often defined as "a basket of securities." But what does that mean?
ETFs are just collections of individual stocks tied together in one tradable fund. It's filled with underlying securities that help the fund achieve a common strategy. For example, you might invest in QQQ, an ETF that tracks the Nasdaq 100 Index. Or you might pick TAN, which tracks companies involved in the development of solar power.
Buying individual stocks vs. ETF shares: Key similarities and differences
Both stocks and ETFs trade on exchanges through a ticker. Despite the fact that ETFs represent a collection of underlying stocks, you can still buy individual shares in the same place you buy your stocks. Stocks and ETFs function the same in the trading process, but they differ when you pull back the covers.
The nature of ETFs means they offer more diversity than singular stocks. Many people say that diversification is one of the most important parts of investing. Still, ETFs tend to target a specific sector or strategy, so they're not immune from risk.
Risks and opportunities in individual stock picking
In 2020, American restaurant chain TGI Fridays announced they were going public via a reverse merger with a special acquisition company (SPAC). Investors started to buy into the SPAC's public stock in anticipation, only to find out the deal was off.
Investing in one company can be risky, because your money is dependent on the brand's performance.
However, average returns for the US market sit around 10% annually. Buying individual stocks gives you the chance to see much higher returns. HubSpot stock is up about 178% over the last 12 months. Tesla is up 273% in the same period.
What to know before buying different ETF stocks
Because ETFs are a type of fund, there are different factors to look into. Ask yourself these four questions before buying ETF shares:
What's the expense ratio? This is the rate of fees. Actively managed funds usually sit around 0.5-0.75%. Passively managed funds have lower fees.
Who's the fund manager? Make sure you know and trust them.
What are the underlying securities? Make sure you're investing in companies you believe in and trust.
What's the investing strategy? Is it viable in the long term?
The bottom line on buying individual stocks vs. ETFs
Don't be afraid to dabble in ETFs and stocks. A well-balanced portfolio has more than one type of investment. Both carry their own risks and opportunities, which means you should always do your due diligence before you start trading.
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