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When it comes to trading, there are various financial products available for you to trade, including stocks and Exchange-Traded Funds (ETFs). When you trade stocks, you are essentially trading a small piece of a company. On the other hand, when you trade ETFs, you are trading a combination of multiple stocks within a single fund.
To help you understand these two products better, this article will dive into the comparison between ETFs and stocks, to uncover the similarities and differences between these two asset classes.
ETFs vs. Stocks: A Brief Comparison
Choosing between ETFs (Exchange Traded Funds) and individual stocks requires careful consideration of your financial objectives, risk tolerance, and financial knowledge. ETFs are designed to provide traders a way to diversify their portfolio for a fee, commonly referred to as an expense ratio, which covers the fund’s management costs. On the other hand, investing in individual stocks allows for targeted asset allocation but may come with broker commissions and transaction fees, adding to the overall cost of trading.
Since ETFs consolidate various stocks into one fund, the poor performance of a single stock can be offset by others that are performing well. This instant diversification is a key value proposition of ETFs, allowing you to spread your eggs across multiple baskets in a single trade.
In contrast, stock trading requires traders to select a specific company to trade, which demands research and time. Traders would be required to understand the company’s operations, its role within the broader market, and how global economic factors influence it. With individual stock trading, your success is dependent on picking a company that has the potential to increase in price.
Similarities Between ETF and Stocks
Tradable on financial exchanges
Both ETFs and individual stocks represent tradable assets that can be bought and sold on exchanges. These products are available for traders to trade throughout the trading day, which can be a potential advantage. This intraday liquidity provides a unique advantage when compared to other tradable assets that might only allow for end-of-day transactions or have other trading restrictions.
Whether it’s a reaction to breaking news, corporate earnings reports, macroeconomic data releases, or simply sentiment shifts in the market, traders have the flexibility to adjust their positions in ETFs and stocks promptly.
Dividends
Investors of both ETFs and stocks can enjoy receiving dividends, provided the company (or companies within the ETF) give out dividends.
While individual companies distribute dividends as a way to share a portion of their earnings with stockholders, ETFs too can distribute dividends. When an ETF owns shares in a company or multiple companies that pay dividends, the ETF will accumulate these dividend payments. After deducting any applicable fees or expense ratios, the ETF will then distribute the accumulated dividends to its fund holders.
Liquidity
Another similarity shared by both products is their liquidity. In financial terms, liquidity refers to the ability of an asset to be easily converted into cash without significantly affecting its price. Most well-known or widely traded ETFs and stocks, such as the S&P 500 ETF and the stocks that comprise it—like Apple, Microsoft, and Nvidia—are all highly liquid. This high level of liquidity ensures that traders can enter or exit positions promptly with minimal price discrepancies.
To gain a deeper understanding of the concept of liquidity, read our article covering how to use liquidity.
Here’s a summary of the similarities between ETFs and stock in a table for easier reference:
| ETF (Exchange Traded Fund) and Stocks | |
| Tradability | Tradable on exchanges throughout the trading day. |
| Liquidity | Provides intraday liquidity, allowing prompt adjustments to market reactions |
| Dividends | Both will receive dividends depending on the stocks they’re associated with. However, ETFs deduct fees before distribution, while individual companies distribute dividends directly to stockholders. |
Table 1: Similarities Between ETFs and Stocks
Additionally, with Vantage, traders can trade both ETFs and stocks using Contracts for Difference (CFDs) which allow you to seize opportunities in both the rising and falling market for both products without having to own the underlying assets. Open a live account with Vantage today to start trading ETF and stock CFDs.
Differences Between ETF and Stock
ETFs and stocks might seem similar at first, but they have key differences. One of the primary distinctions is their underlying structure. An ETF is like a basket that holds a mix of assets such as stocks, bonds, or commodities. So, when you buy an ETF, you’re essentially buying a piece of this entire basket, getting a taste of all the constituents inside. On the other hand, when you buy a stock, you’re purchasing a piece of a single company. Your portfolio will be solely based on how that single company performs.
Another difference lies in diversification. With ETFs, since they can hold multiple assets, you naturally get more diversification. This means if one company in your ETF isn’t doing great, others might be performing better, balancing out the overall performance of the ETF. Stocks don’t offer this balance. If you buy stock in a company and it doesn’t do well, your trade will take a direct hit.
Lastly, there’s the matter of fees. ETFs often charge a small fee for managing the fund, which might reduce the dividends you receive. These fees can impact the overall returns of the ETFs and it will eat into the traders’ potential returns. With stocks, there’s no such management fee.
Here’s a summary of the differences between ETFs and stock in a table for easier reference:
| Feature | ETFs | Stocks |
| Structure | A basket holding a collection of assets or mixed assets (stocks, bonds, commodities) | Represents a piece of a single company |
| Investment Nature | Buying a part of the entire basket, sampling everything inside | Directly investing in the performance of one company |
| Diversification | Provides natural diversification; poor performance of one asset can be offset by others | No inherent diversification; directly tied to company’s performance |
| Impact on Poor Performance | Others in the basket might perform well, balancing out | Direct impact on trade, with potential losses |
| Fees | Charges a management fee, which can reduce dividends and overall returns | No management fees involved |
Table 2: Differences Between ETFs and Stocks
Example of Trading ETF vs. Stocks
For this example, we will be using the technology sector as the chosen sector to trade.
For a trader who chooses to trade an ETF, they might opt to trade a technology-focused ETF, such as the QQQ ETF, which pools together shares from various technology-related companies, such as Apple, Microsoft, and Nvidia. By buying this ETF, traders will gain exposure to all these companies at once. This means that if one company doesn’t perform well, the better performance of other companies within the ETF can help balance it out.
On the other hand, if you decide to trade technology-focused stocks, you might buy shares directly in one specific tech company, for example, Apple. As a trader, your potential for making a return on the trade is highly tied to Apple’s company performance. If Apple releases a groundbreaking product and its stock price increases, your trade value will increase. However, if the company underperforms, your stock value can decrease. There’s a higher potential for making a bigger return, but it also comes with more concentrated risk.
If you aim to replicate the diversification of an ETF like QQQ by buying individual stocks such as Apple, Microsoft, and Nvidia, it can get expensive. Each separate stock purchase incurs its own transaction fees, making it costlier than the single fee of buying an ETF. Plus, you’d need more capital since you’re buying whole shares from each company. In short, ETFs offer a more budget-friendly way to gain diverse exposure than buying each stock individually.
Conclusion
Both ETF and stock trading offer two completely trading products, each with its unique characteristics. Choosing between ETFs and individual stocks depends on your financial goals, risk tolerance, and level of involvement in managing your trades.
Additionally, Contracts for Difference (CFDs) present another trading option. CFDs allow traders to seize trading opportunities on price movements of an asset, like stocks or ETFs, without owning the underlying asset. They provide flexibility but come with their own set of risks and may not be suitable for all investors.
Traders can sign up for a live account with Vantage to start trading ETF and stock CFDs. Trade both rising and falling markets using CFDs and take advantage of both market opportunities.
