Green or seasoned, the one question on every investor’s mind is: “How do I choose the best stocks or ETFs to invest in?” There’s unfortunately no foolproof formula that works all the time (then we’d all be rich!), and every investor figures out how to make his/her decisions over time. Nonetheless, guidelines help and you might just find this article to be worthwhile.
The first thing you’ll want to decide once you’ve signed up with a new Gratis account, is whether or not to invest in individual stocks, ETFs, or a mix of both. Every investor has their own personal style and investing goals. Some investors prefer a diversified portfolio, while others prefer a concentrated one. Let’s take a closer look at which style might be the best for you!
What is the Difference Between Stocks and ETFs?
A stock is the equity of a single corporation, such as Apple or Tesla. When you buy stocks of a company you purchase them in units called ‘shares’. The stock price you see associated with each company and ticker symbol is the price per one share.
An ETF (Exchange-Traded Fund) is a basket of individual stocks or other assets that are held in a fund. ETFs can be traded just like the stocks or other assets they’re composed of. Generally, ETFs see less price volatility but also less long-term capital growth than if you owned the individual stocks. ETFs such as a “tech companies ETF” can help investors to gain exposure to specific sectors, or an ETF curating a variety of stocks and assets can serve an investor looking for diversification.
One primary difference between a stock and an ETF is that while the provider of the ETF owns the underlying stocks and assets, the shareholders buying a portion of the EFT do not.
ETFs are similar to mutual funds, but they are typically passively managed and therefore have much lower management fees than traditional mutual funds. If you own an ETF you will pay what is called a management fee which is an annual percentage of your holdings that are paid to the company that manages the fund.
The two assets share a lot in common too! You get paid dividends for both stocks and ETFs if they pay them, and you can also trade options contracts for both. In terms of their market mechanisms, ETFs are intended to function exactly like a stock would.
When Should you Consider Buying Stocks or ETFs?
If you love and have the time to track the market every day and are actively managing your portfolio, then you might be more inclined to directly buy and sell individual stocks. Investigating to pick the right stocks, and watching your portfolio grow over time is thrilling.
And for those who want to take a more passive approach and let the power of compounding work its magic, ETFs are probably the better choice. Holding and managing a portfolio of ETFs, you can still grow your wealth over time.
Whether it is with individual stocks or with ETFs, the end goal is to grow your wealth. Always remember, as long as you’re doing what’s right for you, there is no wrong way to invest!
Advantages and Disadvantages of Investing in Stocks
Investing in individual stocks is advantageous to investors who know the market well. When you invest in stocks directly, you don’t pay any additional management fees, and you reap the full benefit of any large moves to the upside.
Unfortunately, when you own stocks you are also exposed to large moves to the downside too. There is also always a chance that you read the signals wrong or the market behaves unexpectedly.
Advantages and Disadvantages of Investing in ETFs
Investing in ETFs is a more passive approach to dealing with stocks. ETFs allow you to simply leave your money spread out over a basket of stocks and allow that position to grow over time. One of the most popular ways to invest in ETFs is to buy the S&P 500 ETF. Since its inception in 1957, the benchmark index has gained an average of 10% annually.
Disadvantages? By their nature, ETFs do not see as much price movement as individual stocks. This adds some stability to your portfolio, but it also limits your long-term capital growth. Also, you’re limited by the selection of stocks made by the provider of the ETF.
Liquidity of Stocks and ETFs
The liquidity of an asset is another differentiating factor. Since ETFs are not actual shares of a company, they can theoretically keep getting created without diluting the price. But with stocks, each company only issues a certain number of shares. If the company adds more shares to the float, then it dilutes the current shareholder equity, thereby making each individual share slightly less valuable.
Choosing Stocks and ETFs
Choosing the right stocks and ETFs to invest in is part of being a good investor. It takes time to research and understand each company, to fully understand what you are investing in. When it comes to individual stocks, indicators like past performance, financial statements, and industry competition are just some of the factors you should consider.
For ETFs, take a close look at their asset composition, past performance, dividend distribution, and management fees. Choosing the right assets to invest in is the most difficult part of investing, but if you make the right choices early on, you can reap the rewards for the rest of your life!
So now that you know more about investing in stocks and ETFs, download the Gratis App and start investing today!