ETF vs Stocks: What’s the difference?
You’ve done your research and you’re vibing the confidence to start investing your money. You start exploring your options and immediately hit a wall of jargon. What exactly are stocks? Or ETFs? Is one better than the other? What are the features of each? Are stocks the same as shares? Where do I start?! Don’t abandon ship, putting investing in the too-hard basket. Give us a few minutes and we’ll break it down for you.
What’s an ETF?
Think of an ETF as a pre-filled basket of shares packed with different investments. They can include shares in companies, bonds, cryptocurrencies, real estate and gold. Investing in an ETF means you spread your money over tens or hundreds of investments, and you own a slice of everything in it.
Do you have KiwiSaver? If you do, your money will be spread across loads of different companies and industries. An ETF is the same concept. The acronym ETF literally stands for exchange traded fund. It’s called this because you buy and sell shares in it through the stock exchange, aka, a share market. Sound scary? It doesn’t need to be! And learning more can help you get over the fear of the unknown.
You can see what’s in each ETF before choosing whether you want to invest in it by going to the ETF’s investor centre. To find it, google ‘ETF name + investor centre’. Your ETF basket could even look a little like the contents of your shopping trolley; there might be some Apples, Gillette razors, Campbell’s mushroom soup and potentially hundreds of other companies. Say goodbye to decision-making anxiety around picking the ‘best’ company to invest in, because you could choose to own a bunch of them.
Can you make money from ETFs?
ETFs work in the same way as many other investments, which means the value of your investment can go up and down. It's only when you sell your ETF shares that determines whether you make a profit or loss.
If you’ve bought shares in an ETF several things could happen - some that make you money, and some that do not.
- The ETF increases in value: If the investments in an ETF increase in value over time, the share price of the ETF also increases. It works similar to capital gains on a property.
- The ETF decreases in value: The investments in an ETF can drop in value, bringing the share price of the ETF down with it.
Some ETFs pay dividends: these are cash payments that the ETF receives from the investments within it and forwards to shareholders like you.
So, what are stocks?
‘Stock’ is commonly used jargon that means the same thing as a ‘share’. There are subtle differences. ‘Stock’ refers to the company, ‘share’ refers to each slice of the company. But many investors use the terms interchangeably.
Can you make money from stocks?
Just like an ETF, the value of your stock investment can go up and down. While it’s possible to make money, be aware that if the company doesn’t do as well as you expected, shares might decrease in value.
Here are two scenarios where you could see a positive return on your investment:
- Dividends: some companies share their profits with their shareholders and pay dividends.
- The stock increases in value: shareholders may be able to make profits on investments by selling shares at a higher price than when they first purchased them.
Of course, selling your shares while the price is down could see you lose part of your investment. That’s why doing your due diligence and understanding the potential positive and not-so-positive outcomes of investing is very important, and know that there are always risks involved.
What’s the difference between a stock and an ETF?
You can invest in ETFs through the share markets, just like stocks. Depending on your budget, you can buy as many or as few shares of either or both. You can even purchase a fraction of a share with Hatch. This is known as fractional investing and can make investing more accessible for people with smaller amounts of money to invest.
Those are the similarities, so what are the differences?
Diversification: the eggs in basket analogy
ETFs are made up of many stocks of different companies. This is part of their appeal for some investors. Buying an ETF means investors can spread their money over lots of different investments at once.
Alternatively, when you buy a stock in one company all you’re getting is a piece of that one company. If that one company sees a downturn, you may not have other stocks in other companies to cushion that blow, as all your eggs are in one basket.
Share price swings
Historically, ETF prices have been less likely to move around as much as the stocks of an individual company. This is because of the larger number of investments within the ETF, which can level out price bumps. But just like individual stocks, ETF prices go up and down, especially thematic ETFs or those that target niche industries. Never assume that investing in an ETF automatically means less risk!
Free to choose
ETFs are ready-made investments that are chosen by professional fund investment managers. It’s the fund managers’ jobs to choose which companies go into a basket. All you have to do is decide which basket you want to buy. However, if you’re buying shares in a large ETF, you may end up backing companies or industries that don’t match your values, even if they only make up a small percentage of the total ETF.
When you buy an individual stock, you’re choosing to back a particular company. It’s up to you to do the research - rather than a professional fund manager - and decide if you believe their business is on track to make the decisions it needs to grow in value some time in the future. Choosing individual companies to invest in means that you can be more selective about investing in things that align with your values.
With investing you're in the driver's seat and decide what goes into your portfolio and why. You determine which stocks or ETFs (or both) fit your financial goals.
Which types of ETFs are on Hatch?
There are nearly 3,000 ETFs listed on the US share markets and Hatch has almost 1,300 of them for you to choose from.
Here are just a few of the kinds of ETFs you can access through Hatch:
Total share market
These ETFs aim to give you the most diversification possible by including companies across all the share markets in the world like the Total Stock Market, or one or more individual markets like Emerging markets or the US Total Stock Market. An ETF loved by the investing legend himself, Warren Buffet, is an S&P 500 ETF, which contains the 500 largest companies in the US.
Thematic ETFs group companies by theme, and make it possible for everyday investors to back what they believe. This includes everything from solar power and gender diversity to space exploration and gaming. Keep in mind that a thematic ETF can mean your money isn’t spread across as many different companies and industries. Less diversity can mean higher risk.
These make it possible for you to invest in a lot of companies within an industry without having to handpick each one. They can include industries like cannabis, gold, technology, and aerospace defence.
Choosing the investment right for you
When it comes to ETFs and stocks, it’s not about either/or – you can research and make your decisions to invest in both types of investments. As always, we're going to tell you to research before you start investing your money. We’re repeating ourselves because it matters!
Research doesn’t need to be complex, or time-consuming. But it’s important for your mental and financial health that you understand what you’re investing in and why. You could start by looking into the individual companies you believe in and ETFs that pique your personal interests. Then back your own research to build a unique portfolio.
We’re not financial advisors and Hatch news is for your information only. However dazzling our writing, none of it is a recommendation to invest in any of the companies or funds mentioned. If you want support before making any investment decisions, consider seeking financial advice from a licensed provider. We’ve done our best to ensure all information is current when we pushed ‘publish’ on this article. And of course, with investing, your money isn’t guaranteed to grow and there’s always a risk you might lose money.