When it comes to stock investing, there are a lot of different options to choose from.
2 of the most common ways you can invest in stocks are individual company stocks, or Exchange-Traded Funds (ETFs). But which is the best option for you?
In this blog post, we’ll take a look at the pros and cons of investing in ETFs vs individual stocks, so that you can make an informed decision about which is right for you.
What Is An Individual Stock VS an ETF?
Before we get into the pros and cons of investing in ETFs vs individual stocks, let’s briefly take a look at what each of these are.
Individual company stocks are just that – stocks in a particular company. When you purchase a stock, you are buying a percentage of the listed company, and as part of that you are entitled to a share of its capital gains.
ETFs (Exchange-Traded Funds), on the other hand, are funds made up of a group of any combination of different asset classes, such as stocks, bonds, commodities, precious metals, currencies, and more recently cryptocurrency as well – to keep things simple, for the remainder of this post I will be focusing on stock ETFs.
From a stock investor or trader’s perspective, these 2 operate almost identically when it comes to executing an order on the stock exchange. They both involve entering a stock code into a brokerage platform and either buying or selling at a certain price.
However, because of the nature of their composition, there are a few key differences with what you can do with them as an investor or trader.
A Detailed Comparison Between Stock ETFs and Individual Stocks
Now that we know a little more about what ETFs are, let’s take a look at some of the pros and cons of investing in them compared to individual stocks.
There are some key differences between investing and trading ETFs versus individual stocks, 2 of which I’d like to focus on:
Diversification
One of the biggest advantages of investing in ETFs is that they offer a lot of diversification under one purchase, which can help to mitigate some of the risk that comes with investing in individual stocks.
When you invest in an ETF, you are essentially buying a basket of different stocks in the one go. This saves you the trouble of having to individually research each stock and think about how to diversify you portfolio.
However, a downside of this is not knowing what’s actually in your portfolio. If you’re someone who likes to know every detail about what you’re investing in, then ETFs might not be the best option for you.
Transparency and Ease of Research
Lastly, ETFs can be less transparent than individual stocks. This is because ETFs do not have to disclose their holdings on a regular basis.
What this means is that as an investor, you might not be able to easily find out exactly what’s in the ETF that you’re thinking of buying. It also means you can’t research and conduct financial analysis like you normally would with individual stocks.
On the other hand, individual company stocks have their financial information much more readily available. This makes it easier to research individual stocks before making an investment decision.
So if you’re someone who likes to know exactly what’s in your portfolio at all times, then you might prefer to invest in individual stocks over ETFs.
ETFs vs Individual Stocks: Which is Better?
So which is better – investing in ETFs or individual stocks?
The answer to this question depends on a number of factors, including your investment goals, risk tolerance, and time horizon (i.e. when you want to achieve your investment goals).
If you’re someone who:
- is looking for a hands-off approach to investing in a diversified portfolio of stocks
- has no interest in researching individual company stocks
- don’t care about knowing what’s actually in your portfolio
- don’t mind leaving things up to the fate of the markets over the long-term
then stock ETFs might be the better option for you.
However, if you:
- want to be more involved with your making your financial goals a reality
- are interested in researching stocks and don’t mind spending 30-40 minutes a day doing so
- like to have more control over your portfolio and be able to time your investment entry and exits more accurately in the short to medium term, while still having the flexibility to keep things over the long-term if you so desire
- want to know exactly what you’re investing in at all times
then individual stocks are probably best suited for you.
Personally, I’m in the latter camp, so my main strategy is to invest in individual stocks.
Things are Not Black and White – You Can Invest In Both
Having said what my preferences are however, I do sometimes look into and trade ETFs — usually for the purpose of hedging against any market crashes I anticipate might be coming, such as shorting the market (I talk a little bit about this in my blog post about how I preserved my portfolio during the COVID-19 crash).
At the end of the day, there’s no right or wrong answer when it comes to deciding whether to invest in ETFs or individual stocks. It all depends on your own personal circumstances and investment goals.
So choose what works best for you.
Terry
