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Highlights
- Stocks help investors to grow their savings at a faster pace than ETFs.
- However, ETFs carry lesser risk than stocks.
- Both investing strategies can be wonderful options, depending on investor to investor.
Investing in stocks is sort of an art, which if executed deftly, can help investors enrich their coffers. By choosing right options and employing sound investment strategies, investors can potentially turn $10,000 into $500,000 over time. However, investors also need to be mindful of the fact that stock markets are prone to be volatile at times. The high-flying stocks piquing your curiosity, could be weak in terms of fundamentals and may turn out to be a loss-making affair finally.
Then there are exchange-traded funds (ETFs). An ETF is a type of investment fund that is traded on stock exchanges. They hold similarity to mutual funds in some ways, except that these funds are purchased and sold throughout the day on stock exchanges. However, mutual funds are purchased and sold based on their price at the end of the day.
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Both investing strategies can be wonderful options, depending on investor to investor. Thus, if you are confused whether to buy stocks or ETFs, here are three points to consider:
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Are you ready for a detailed research?
Research plays an important role when deciding between stocks and ETFs. Stocks require more detailed research than ETFs. Investors need to be doubly sure about the quality of stocks being included in their investment portfolio because the returns depend on their stock selection to a large extent. In case of ETFs, you invest in one ETF and end up automatically investing in all the stocks included in that fund. Thus, stocks are more research oriented than ETFs.
How much do you want from your portfolio?
Investors are in higher control when it comes to individual stocks rather than the stocks owned through ETFs. Thus, individual stocks are a good idea for investors seeking complete control over their investment; ETFs may work fine if a highly personalised portfolio isn't at the top of your priority list.
With individual stocks, you are free to sell them anytime down the line or rebalance your portfolio. However, it’s not that flexible with ETFs since someone else is managing the fund for you.
But this doesn’t mean ETFs don’t stand anywhere against stocks. There are several examples from the global markets where ETFs have given solid returns to investors for a consistent period. For instance, the S&P 500 ETF is considered a relatively safe investment. It is known to have given an average rate of return of nearly 10% per annum, which is good enough for any scenario.
Suppose you have $10,000 to invest and your investments earn you a 10% average annual return. You could have over $500,000 after 30 years if you continue investing $175 each month in addition to your initial $10,000 investment.
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The Bottom Line
ETFs generally require an investor to invest regularly, without thinking about it for a long time. The fund is capable enough to take care of the rest.
On the other hand, individual stocks require detailed research, as discussed above. You need to be relatively active when dealing with stocks so that they don’t lose their worth over time. Holding stocks for the long term is critical for building wealth.
Note: Please consult your financial planner or do an extensive research before investing in stocks or ETFs.
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