Introduction

The stock market is a lucrative and inviting option if you want to increase your wealth through investments. However, the sheer number of investment vehicles may overwhelm you. The simplest way to make sound investment decisions is to understand the options available to you and learn how to invest in different securities. One such decision you may have to make is choosing between stocks and ETFs. Each comes with its own set of benefits and drawbacks; if you understand these differences, you can make sound investment decisions.

In this article, you will be introduced to stocks and ETFs and factors that will help you decide which is an ideal fit for your investment portfolio.

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Understanding Stocks

Publicly listed companies raise funds by issuing stocks on stock exchanges such as the National Stock Exchange (NSE). Stocks or shares signify your ownership in the concerned company, so by investing in stocks, you also become shareholders of the said company. The two types of stocks available to you are common and preferred shares. The difference between the two lies in terms of legal voting rights in the company, repayment of capital, and payment of dividends.

Understanding ETFs

Exchange-traded funds (ETFs) are collective holdings that denote a basket of securities such as bonds, stocks, etc. By investing in ETFs, you don’t get ownership or shares of any company, but you invest in a basket of securities instead of individual securities such as stocks. ETFs are built to replicate the performance of an underlying index, price ranges, and so on.

Pros and Cons of Investing in Stocks

Here are the benefits of investing in stocks:

• Investing in stocks can be a great way to generate promising returns for your portfolio.
• You can earn dividends depending on the invested company’s performance.
• You can invest in stocks of multiple companies across different sectors. This offers portfolio diversification to mitigate your risk and increase profitability.

Consider the following before investing in stocks:

• Though stocks offer liquidity, in an unfavourable market, finding buyers is difficult, which reduces your liquidity options.
• You cannot eliminate market volatility and therefore must learn to deal with it. You need to learn to respond rationally and calmly to price swings and market trends.
• Due diligence is important when selecting any investment vehicle. You must stay abreast of market volatility and trends and thoroughly research your options before investing.

Pros and Cons of Investing in ETFs

Here are the benefits of investing in ETFs:

• You get instant access to a diversified portfolio without choosing individual securities when you invest in ETFs.
• You get trading flexibility since you can trade ETFs all day long and potentially yield higher returns by leveraging market trends.
• You pay low fees since the accounting expenses, transaction costs, and management fees are lower.

Consider the following before investing in ETFs:

• Since ETFs are structured to mimic the performance of an underlying index such as Nifty 50, any tracking error can result in reduced returns and increased risk for you.
• You may find passively managed ETFs cost-efficient.
• Dealing with price volatility is a challenge for you as an ETF investor. You must understand and leverage it instead of panicking.

Stocks vs ETFs: What to Choose?

Now that you understand the pros and cons of investing in stocks and ETFs, the next step is to choose one.

You can trade both these investment instruments in a similar fashion. Both are taxable and offer you multiple options. You can sell short and buy at a margin. However, they differ in terms of diversification, accessibility to industry, and portfolio control. For instance, investing in an ETF offers you instant portfolio diversification that cannot be achieved by investing in a single stock. Similarly, stocks offer you direct control over buying, holding, or selling. You will have to depend on a fund manager for that control in ETFs. Finally, by investing in stocks you can gain access to a specific industry, while ETFs offer you access to varied industries according to the fund’s goals.

The answer to “What to choose between stocks and ETFs?” boils down to your investment goals and risk tolerance. Stocks are a better option if you want to be actively involved in managing your investments. However, if you are keen on earning profits without regularly monitoring the market, you should opt for ETFs.

Conclusion

Investing in the stock market is an excellent way to make your money work for you. However, diligence is needed before selecting an investment instrument. As with any other form of investment, consider your risk tolerance, investment horizon, and investment objectives when choosing stocks or ETFs to make sound investment decisions.

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