That’s what you get with an ETF or an exchange-traded fund. They’re often referred to interchangeably as index funds — and compared to stocks, they’re among the most commonly heard-about options for beginner investors, and remain the best choice when compared to buying individual stocks.
New investors, while excited to learn, can all too easily fall prey to beginner investing mistakes like analysis paralysis when trying to weigh the pros and cons of each investment vehicle. Meanwhile, you might hear conflicting advice about which stocks are too risky and which ones are “sure things” (even though there’s no such thing in the stock market).
Of course, it’s important to be informed, but in truth the best time to start investing is today. So let’s talk about whether you should invest in stocks or ETFs. Once you break it down, you’ll see that experts recommend ETFs over stocks in almost all situations.
Stocks vs. ETFs — What’s the Difference?
Stocks give shareholders a piece of a company. They’re also known as ‘“equities.” The more shares you purchase, the more you’re expressing ownership of a company. If the company loses money, so do you (because the value of your stock goes down). Many companies, but not all, offer dividends, or payment a company makes to shareholders.
“The biggest difference is that when you’re looking at a single stock, you’re buying into a singular company,” explains Lori Gross, financial and investment advisor at Outlook Financial Center. For example, if you own shares in Apple, your gains and losses are driven solely by Apple’s performance. Owning individual stocks is risky because your investments are pinned to a single company’s future performance.
ETFs on the other hand contain hundreds, if not thousands, of stocks from companies in various sectors and industries. “When you buy an ETF, you’re looking at a basket of stocks,” says Gross. For long-term investing, ETFs are generally considered safer investments because of their broad diversification. Diversification protects your portfolio from any one single downturn in the market since you’re money is spread out among these hundreds, or thousands, of stocks.