Stocks vs ETFs: what are the differences?
When investing in stocks and ETFs, you'll consider things like risk, liquidity and your personal strategy. Learn more about the differences of investing in stocks or ETFs with us.
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What are the differences between stocks and ETFs?
The difference between stocks and ETFs is that a stock is a single tradeable asset (ie shares that track a company's performance), while ETFs track the performance of a range of markets, including multiple shares. Below is a table on how these financial assets differ depending on whether you trade or invest in them:
| Stocks | ETFs |
|---|---|
| You can trade or invest in a single company like Microsoft | Trade or invest in a collection of different stocks, bonds, or other securities like the iShares Core S&P 500 UCITS ETF |
| When you invest in stocks, 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 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 that 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 stock 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 or trade on the share price rising and falling. When you invest in stocks, 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 commission on US shares, and just £3 on UK shares.1 Once you take ownership of the stock, you’ll become a shareholder, have voting rights and get dividend payments if the company grants them.
When trading in stocks, you’ll use derivatives like spread bets and CFDs to speculate on the price direction 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, you face the risk of having your entire position wiped out if the share price falls. 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 stocks, 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 on a wide range of markets. When you have a short-term outlook, you can trade on over 5400 ETF markets using spread bets or 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,2 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 specific 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 ETFs via our share dealing account or managed portfolios. Note that the level of risk is different when using a share dealing account and managed portfolio to get exposure.
Our share dealing account enables you to invest in over 2900 ETFs and pay just £3 commission on UK-listed ETFs.1 Alternatively, you can get exposure to a range of markets using our Smart Portfolios.
Our Smart Portfolios are expertly managed by industry professionals with a track record, built to suit your financial goals. With us, you’ll be assisted by wealth managers to choose an investment fund that’s spread across shares, bonds and commodities to suit your needs and risk appetite.
You can choose a portfolio that is risk averse, however, there’ll be low rate of return (RoR). Therefore, using our Smart Portfolios to get exposure to ETFs tends to be less risky than using our share dealing platform.
ETFs vs stocks: advantages and disadvantages
| ETF | Stock | |
|---|---|---|
| Advantages |
|
|
| Disadvantages |
|
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Should you invest in stocks or ETFs?
Here’s a comparison between stock and ETFs to help you choose which market to invest in:
| Stock | ETF | |
| Risk appetite | High | Low – med |
| Return expectation | High | Low |
| Amount of research or analysis require | High | Low |
| Investing experience | Med – high | Low – high |
| Time requirement for research and analysis | More time needed | Significantly less |
| Market access | 13,000+ stocks | 2900+ ETFs |
| Tax | Taxable | Taxable |
| 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 – med |
Stocks vs ETFs: returns and risks example
Take a look at the performance of Apple 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 2013 was £10,000 with a long-term investment horizon of ten years right through to January 2023.
To calculate the annual return on a ten-year investment, we’d take Apple stock’s share price on 22 January 2013 (15.5034) which represents the standard deviation of the portfolio (SP) divided by the expected return of the portfolio (EP) on 20 January 2023 (137.87). Here’s the formula below:
Annual return = 100 x ([137.87/15.5034]1/10 - 1)
= 24.42 %
Therefore, over a span of ten years, your investment into Apple shares would’ve now accrued £88,900. 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 £10,000 and you invested in the S&P 500 index from 2012 through to 2021. 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 £1480 (14.8% of 10,000 = 1480). Taking into consideration compound returns, you’d get 14.8% of your new total (£10,000 + £1480) £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 stocks and ETFs
Here’s a simple step-by-step guide on how to start investing with us:
1. Decide whether you want to open a share dealing account or managed portfolio
With us, you can choose to invest using our share dealing offering or Smart Portfolios. Our investment account gives you access to over 13,000 global markets that include shares, ETFs and investment trusts.
If you’re a beginner, ensure that you have a firm grasp on your asset of choice and the investment account you want to use to get exposure.
For investors that are familiar with the product offering or already have an account elsewhere, we can assist you in transferring your investment to our account.
2. Choose between investing in ETFs or stocks
You can choose to invest in more than 5400 ETF markets on our award-winning platform3 that include a wide range of sectors, indices, bonds, commodities and more.
Also, you can invest in over 13,000 popular stocks, and pay zero commission on US shares and only £3 on UK shares.1 Before you choose, you can sharpen your knowledge on investment vehicles by creating a demo account to see how the markets move.
Our demo account simulates the market in real-time, enabling you to practice your strategy in a risk-free environment. Once you are confident in your skills, you can upgrade to a live account.
3. Fund your account
You’ll deposit funds into either your share dealing account or Smart Portfolio using any card, PayPal or bank account that’s registered to you.
Depending on the type of payment method you’ll use, you need to ensure that you meet the minimum deposit. When using PayPal, credit or debit card, you’ll need at least £500 while there’s no minimum deposit for a bank transfer.
4. Look for your opportunity
Risk takers are prone to investing in stocks because it’s a volatile market and there’s generally deep liquidity. For assuming the risk involved in investing in stocks, you could receive a handsome reward if the stock appreciates over time. You’ll also bare 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.
5. Open and monitor your investment
Pick the stock or ETF you want to invest in from our full range of markets and set the size of the position. You’ll also need to consider the timeframe you want to invest, choosing between a short-, medium- or long-term investment before you place your order.
With us, you’ll deal shares either ‘at quote’ or ‘on exchange’. If you choose at quote, we’ll facilitate the process to get you the best price available from market makers, and all you’ll have to do is confirm your order.
Alternatively, you can deal shares on exchange, where you’d select an order type and input the price you want to buy or sell at. The price will be added to the exchange’s order book and a willing counterparty will act by accepts it.
FAQs
What is a managed portfolio?
A managed portfolio is an investment management service handled by expert to assist you in reaching your financial goals. With us, you’ll use our Smart Portfolio to get exposure to thousands of global markets, handled by wealth managers with a track record to help you with positions that meet your risk profile.
Is it less risky to invest in ETFs than stock?
Yes, it’s less risky to invest in ETFs than stocks as stocks are more volatile. ETF funds have multiple constituents, making the risk spread out. If the share price of a single company plummets, investors will lose they initial outlay.
With ETFs, one constituent’s share price may fall, and you wouldn’t lose your investment because other securities may perform better. However, note that both securities are risky, and you’ll need to take steps to manage your risk.
How long should I hold an ETF for?
You could hold on to ETFs for a duration that spans a decade or longer. This is because average returns on major index ETFs have less variance of periods longer than ten years, while the relative risk in the market tends to lessen over time.
How long should I hold a stock for?
You could hold on to your stock investment until your financial goals are realised. The stock price fluctuates frequently, so you can hold a position shorter than a day and profit from a change in direction. Alternatively, you can hold on to your position for several years with hopes that your stock appreciates over time.
Are ETFs good for beginners?
ETFs can be good for beginners because they tend to be less risky. An exchange-traded fund comprises of different securities that spread the risk around to ensure that your investment isn’t wiped out if one asset takes a downturn. Beginners that are risk averse can take a position on ETFs that are well-balanced and meet their risk appetite while risk seekers can invest in a fund that focuses on a particular sector to experience high volatility.
Are stocks good for beginners?
Stocks are one of the most volatile markets around, making them less ideal for beginners to start investing in. Trading on stocks is riskier compared to investing in shares because you can lose far more than your initial deposit if the market moves against you. When you invest in stocks, your risk is only capped on your initial capital outlay.
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1 Trade in your share dealing account three or more times in the previous month to qualify for our best commission rates. Please note published rates are valid up to £25,000 notional value. See our full list of share dealing charges and fees.
2 Wealth Desk, 2023
3 Best trading platform as awarded at the ADVFN International Financial Awards 2022 and Professional Trader Awards 2022.
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