ETFs vs stocks: what are the key differences?
When investing in ETFs and stocks, you'll consider things like liquidity and your personal strategy. Learn more about the difference between investing in ETFs and shares.
When investing in ETFs and stocks, you'll consider things like liquidity and your personal strategy. Learn more about the difference between investing in ETFs and shares.
What are the differences between ETFs and shares?
The difference between exchange-traded funds (ETFs) and shares is that a share is a single tradeable asset, while ETFs track the performance of a range of markets, which could include multiple shares. Below is a table on how these financial assets differ depending on whether you trade or invest in them:
Shares |
ETFs |
You can trade or invest in a single company like Microsoft |
Trade or invest in a collection of different shares, bonds, or other securities like the iShares Core S&P 500 UCITS ETF |
When you invest in shares, you’ll take ownership in a company, get voting rights, and earn dividend payments if the company grants them |
When you invest in some ETFs, you’ll have shareholder rights, and earn dividend payments if the ETF grants them |
It’s relatively risky to get exposure to a single company as your entire outlay could be wiped out if the share price falls |
The risk is spread across a number of stocks, bonds or other securities that form part of the fund |
You can choose to trade or invest in a company that you like |
You can choose to trade or invest in a group of markets from a single entry point |
There’s higher volatility when you buy or trade stocks and more liquidity |
There’s less liquidity in smaller EFTs while larger ETFs experience varied levels of liquidity and volatility compared to buying or trading a single stock |
Remember that you can get exposure by trading or investing in both these financial assets with us.
What is a stock?
A stock is the commonly used collective name for all the shares that a single company lists on an exchange. It’s a financial security that represents part-ownership in publicly traded companies.
Generally, beginners get introduced into the world of investing through following the share price of the brands they love. You can get direct exposure to a company’s performance via the stock exchange.
A company will typically apply to list on an exchange for the purpose of raising capital. Once the application is successful, it’ll make its shares available for purchase to investors via an initial public offering (IPO), special purpose acquisition company (SPAC), or through a direct listing.
With us, you can invest in the stock directly through our IG Markets account or trade on the share price rising and falling using contracts for difference (CFDs).
When you invest in shares through our IG Markets account, you’ll buy and hold the shares with a long-term outlook hoping that the company’s shares will appreciate over time. You’ll pay zero commission1 on global shares across the US, UK, Singapore, Hong Kong and Japan. Once you take ownership of the shares, you’ll become a shareholder, have voting rights and get dividend payments if the company grants them.
When trading on shares through a CFD account, you’ll trade on the prices by going long if you think that it’ll rise or go short if you think that it’ll fall.
What are the risks involved with investing in shares?
Since your profit or loss is based on how the company performs, without building a diversified portfolio, you face increased risk when you're only exposed to a single company. Some of the factors that cause the share price to fall include operational issues, changes in management, demand and supply and many other business risks.
Moreover, there are external risks that you need to consider that do not involve the day-to-day running of the company, such as market risk, currency risk, climate change, inflation risk, interest rate risk, counterparty risk, liquidity risk and more.
Remember, when you invest, your risk is capped at your initial outlay amount.
What is an ETF?
An exchange-traded fund (ETF) is an investment instrument that tracks the performance of a range of markets like shares, bonds, indices, sectors, commodities and more.
There are two main types of ETFs available: physical ETFs and synthetic ETFs. With physical ETFs, you track an asset by holding the entire security or a fraction of the constituents that form part of the investment. Synthetic ETFs don’t follow the physical index, but instead, mimic the movement of the underlying market.
ETFs are popular because they enable you to gain exposure to an entire sector or industry from a single position. Additionally, you can build a portfolio that features a diverse range of global markets, suitable to your risk profile.
If you have a long-term investment horizon, you can buy and hold ETFs using our IG Markets account. When you have a short-term outlook, you can trade on thousands of ETF markets with us using CFDs.
What are the risks involved with investing in ETFs?
Even though most ETFs have positive returns over a long-term period compared to stocks (due to a diverse range of markets in the fund), there are still risks that you need to consider. When investing in ETFs, you’ll experience tax risk, tracking error, political risk and many other risks.
While most ETF constituents are made up from different sectors, you seldom find an investment fund that’s focused on a particular industry like technology. In this instance, you’d face market risk, liquidity risk, counterparty risk, climate change and many other risks as a result of the concentration in one market.
Investors that are risk seekers will actively pursue opportunities that bare high risk for the potential of high rewards. While this means that the probability of loss increases, the potential upside tends to be proportional with the high risk involved.
With us, you can invest in thousands of ETFs using our IG Markets account. You’ll pay zero commission on all international ETFs.1
ETFs vs shares: pros and cons
|
ETFs |
Shares |
Advantages |
|
|
Disadvantages |
|
|
Investing in ETFs vs shares
Here’s a comparison between ETFs and shares to help you choose which market to invest in:
|
Shares |
ETF |
Risk appetite |
High |
Low – medium |
Return expectation |
High |
Low |
Market hours |
Trade and invest when the market is open and after hours |
Trade and invest when the market is open and after hours |
Volatility |
High |
Low – medium |
Stocks vs ETFs: returns and risks example
Take a look at the performance of Apple Inc shares over a period of ten years and the potential return on investment (ROI) you could’ve earned during that period. Let’s say your initial outlay in January of 2015 was S$10,000 with a long-term investment horizon of ten years right through to January 2025.
To calculate the annual return on a ten-year investment, we’d take Apple stock’s share price on 1 January 2015 (29.316) which represents the standard deviation of the portfolio (SP) divided by the expected return of the portfolio (EP) on 20 January 2025 (137.87). Here’s the formula below:
Annual return = 100 x ([137.87/29.316] 1/10 - 1)
= 16.74 %
Therefore, over a span of ten years, your investment into Apple shares would’ve now accrued S$47,029. Remember that there’s no guarantee that the same growth rate can be sustained for the next ten years, therefore, you need to take steps to manage your risk.
In comparison, you can look at how the Vanguard S&P 500 UCITS fund performed over a 10-year stretch. Let’s say your initial outlay was S$10,000 and you invested in the S&P 500 index from 2015 through to 2024. According to our expert analysts, the average stock market return for S&P 500 was 14.8%.
For the first twelve months of your investment, your average return would amount to S$1,480 (14.8% of 10,000 = 1,480). Taking into consideration compound returns, you’d get 14.8% of your new total ($10,000 + $1,480) $11,480 to make (14.8% of $11,480) $1,699.04 in your second year.
Investors tend to hold their position for a long time as the relative risk in the ETF market lessen over time. The average returns on major index ETFs have less variance over a period of ten years or more, making it a preferred choice for people with a long-term investment horizon.
Therefore, when choosing to invest in ETFs, you should use money that you won’t need to touch for at least a couple of years to fully reap the benefits of compound returns.
How to start investing in ETFs and shares
Here’s a simple step-by-step guide on how to start investing with us:
Open an IG Markets account
Start investing with us by opening an account through our IG Markets app—available on App Store and Google Play. Simply download the app, answer a few questions and verify your identity with SingPass for instant approval in most cases.
This investment account gives you access to global shares and ETFs. If you’re a beginner, ensure that you have a firm grasp on your asset of choice.
Choose between investing in ETFs or stocks
You can choose to invest in thousands of ETFs or popular stocks across key global markets—including the US, UK, Singapore, Hong Kong and Japan —with zero commission on all trades.
Fund your account
You’ll deposit funds into your IG Markets account using PayNow, bank transfer or any credit or debit card that’s registered to you.
A minimum deposit of S$20 is required. There are no maximum limits on deposits or withdrawals.
Look for your opportunity
Risk takers are prone to investing in shares because it’s a volatile market and there’s generally deep liquidity. For assuming the risk involved in investing in stocks, you could make a profit if the share price appreciates over time. But you’ll also carry the risk of having your investment wiped out if the market moves against you.
If you’re risk averse, you can search for any ETFs that have a diverse range of markets to spread the risk around. You can choose an ETF to ensure that if one market experiences a downturn, another security like bonds may have an uptrend on the other end.
Open and monitor your investment
To place your trade on the IG Markets app, find an asset using search or browse the “discover” section. After reviewing the asset details, tap "invest" and choose whether to enter an investment amount or specify shares. Select either a market order for immediate execution or a limit order at your specified price, review all details including fees, and tap "confirm" to execute. US stocks allow fractional investing with any amount, starting from just S$1.
Footnotes
1 IG Markets has no hidden fees, charges $0 for platform and commission fees.
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