ETFs vs. Stocks visualized
Having dabbled in some low-intensity investing myself, I wanted to visualize this concept to save a lot of time and worry trying to understand it.
An Exchange Traded Fund is a security that tracks a certain category of assets, such as an index, sector or commodity like the S&P 500 index following the 500 biggest U.S firms. An ETF can be structured to track many things, but most often the goal is to track the price of the targeted commodity. An index ETF tracks the index by holding an equivalent proportion shares present in the specific tracked index.
A stock (or equity) is a security that grants ownership to a proportional fraction of a corporation. The stock owner is entitled to a proportion of the corporation's assets and profits pro rata to how much stock they own. Units of stocks are called shares.
Stocks are generally considered to involve much more risk than ETFs, as stocks indirectly track the success of the single corporation that they are part of. If a corporation goes bankrupt, the share price of the corporation most likely dips down, in a worst case scenario to being worth barely anything. However, a person familiar with the sector and specific corporation might reap big benefits if they're aware of upcoming market events or promising new undertakings within the company. Stocks involve more upkeep as they are more prone to risks.
In comparison to stocks, ETFs are considered much safer although less ambitious than stocks. Especially index ETFs, tracking an index, tend to perform very close to the average return of the market. This, however, makes them much less prone to risk, as they're an average of many corporations than a single corporation. If one corporation goes bankrupt, it is swiftly replaced with another corporation taking its place in the index.
Index ETFs visualized
As the graph illustrates, index ETFs consist of a great deal of individual corporation assets, leading to greater stability. The historical trends of indexes always grow as nations strive for economic growth, so ignoring market trends, ETFs bring slower but safer growth.
This graph illustrates the risk of single stocks. If a single corporation would be to fail and go bankrupt like illustrated above with a hypothetical scenario involving the tech firm Microsoft, most of its price would tank down. This presents the obvious risk – stocks require more upkeep to hold in your portfolio, although very large firms with a large market capitalization (or market size in simplified terms) are quite unlikely to fail in the future.
Comparison of the two
As the comparison illustrates, index fund ETFs offer more stability and less risk, whereas single stocks offer less stability but more ambition. As the Rational Society does not offer any kind of investment advice, we cannot define what the right choice is for you. If you're very familiar with a certain sector and group of firms, it might be a good choice to invest a section of your portfolio into a promising company in that sector. But if you're looking for minimal maintenance and more stable profits, ETFs are the way to go.
The Rational Society does not offer investment advice. The text stated above is only an opinion and is for informational purposes only.
The Rational Society is committed to presenting ideas related to the rational school of thought, focused on improving personal issues, overcoming challenges and fulfilling ambitions. It is not a dogmatic ideology but an established mode of thought with the explicit goal of guiding the person to the most logical, healthy and beneficial choice.