What is the difference between ETFs and stocks?

ETF and stocks
As is known, an ETF can have holdings in many different types of assets, including stocks and bonds.

By Manuel Tovar, October 08 – Hispanic Solutions Group

As is known, an ETF can have holdings in many different types of assets, including stocks and bonds. Rather, a stock is an ownership interest in a specific company. While some ETFs consist entirely of stocks, an ETF and a stock behave differently, such as:

  • An individual stock generally moves much more than an ETF. That means you could make or lose more money with a single share than with an ETF.
  • ETFs are more diversified. When you buy a stock ETF, you are harnessing the power of diversification, “putting your chips” on many different stocks rather than just one or a few individual stocks.
  • The return of an ETF depends on the weighted average return of its investments, while with a stock the return depends entirely on the performance of that company.

What is the difference between ETFs and mutual funds?

It is the question frequently asked by the consumer, ETFs and mutual funds have similar structures and benefits. Both can offer a suite of investments, such as stocks and bonds, reduced risk due to diversification, low administration fees, and the potential for attractive returns.

  • ETFs are usually passive investments. Most ETFs tend to follow a predetermined index, investing mechanically based on what is in the index.
  • ETFs are usually cheaper than mutual funds. although passively managed index mutual funds can be cheaper than ETFs.
  • Commissions can be higher with mutual funds. Today, virtually all major online brokers do not charge commission for buying ETFs.
  • ETFs do not have sales charges. Sometimes mutual funds can have a sales load, which is an additional commission to the seller. These funds can represent 1 or even 2 percent of your total investment, hurting your returns. ETFs do not have these fees.

Finally, as you can see, those are some of the biggest differences between ETFs and mutual funds, although they both achieve the same goal of providing investors with a diversified investment fund. While it may seem like ETFs are clearly better, mutual funds are sometimes the best option for low costs.

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