Exchange-traded funds (ETFs) are funds that trade on the stock market and have a fluctuating share price, just like individual stocks.
In some ways, such as trading on an exchange, stocks and ETFs are similar, but there are tons of differences. Plus, each comes with its own set of pros and cons for retail investors.
Here’s the rundown on ETFs vs. stocks, plus how to start your own investing journey with the investment vehicles that fit you best.
Table of Contents:
- Stocks and ETFs, defined
- Similarities and differences between exchange-traded funds and stocks
- How to buy ETFs on Public.com
- Pros and cons of investing in ETFs vs. stocks
- FAQs
Stocks and ETFs, defined
What is a stock?
A stock is a portion of a company that trades on a public stock market exchange. The two major stock exchanges in the U.S. are the New York Stock Exchange (NYSE) and the Nasdaq Exchange.
Stock indexes help investors track the performance of collections of stocks in the market (the S&P 500 and Dow Jones Industrial Average are two popular indexes, for example).
Investors who own stock in a company can vote in company matters (called a shareholder proxy vote) and reap returns (or suffer losses).
What is an ETF?
An exchange-traded fund, or ETF, is an investment fund that can be bought and sold on the stock market just like an individual company’s stocks.
Think of an ETF as a basket of stocks. ETFs can track any kind of index, whether it be a large index like the S&P 500 or a more niche, thematic index.
ETFs are a way to build a diverse portfolio in a single transaction because they have built-in diversification. These funds can contain commodities, stocks, bonds, and other individual securities.
ETFs are made more accessible through the introduction of fractional investing. Investing apps like Public make it possible to buy into diversified ETFs at a lower price-point than you would need to buy a full share of every stock that makes up the fund.
Plus, Public offers a Social Community unlike any other investing app. This makes it easier to invest in line with your values and find valuable investing opportunities.
Similarities and differences between exchange-traded funds and stocks
How ETFs and stocks are similar |
How ETFs and stocks are different |
| Both trade on stock exchanges during open market hours (Monday–Friday from 9:30 am – 4 pm except stock market holidays).
*Some investors can also access them during aftermarket and premarket hours around trading days. |
Stocks represent shares within individual companies, whereas ETFs offer shares of multiple companies within a packaged bundle. |
| Investors buy them both at market prices at the time of purchase, and can set limit orders and stop loss orders on the trades. | ETFs aren’t bound to a single company, so they can contain various investments that make up a more diverse investment portfolio than individual stocks.
*ETFs can contain assets in a particular sector or index. They can also be thematic, including special environmental or social considerations (hey, check out impact investing if that interests you!). |
| They have nearly the same level of liquidity, meaning the ease with which they can be converted into cash.
*Liquidity can vary based on the quality of ETF and stocks being traded. In general, high-quality stocks and ETFs have higher liquidity, whereas penny stocks and the ETF equivalent could take longer to convert |
Unlike stocks, ETFs have something called a net asset value (NAV). The NAV measures the total value of stocks and shares within an ETF, compared to whatever underlying index the fund tracks.
ETFs may trade at prices above or below their NAV but market makers tend to keep them priced close to their true NAV. . Individual stocks, on the other hand, tend to be more stable and always trade at their current value. However, you may see your number of stocks change if you reinvest dividends or the company performs a stock split, share buyback, or secondary offering. |
| At many brokerages, trading both stocks and ETFs come with transaction fees. This may look like a commission fee or something called payment for order flow (PFOF), which is a back-end way for brokerages to make money off of your trade while touting “commission-free” trading.
*Public.com does not charge a commission or PFOF, maintaining full transparency with investors. |
Unlike stocks, ETFs charge expense ratios. This is a percentage of your investment that goes towards fees. ETF expense ratios are typically between 0.2–0.75%.
*Passively managed funds operating on algorithms have lower rates than actively managed funds that real people trade. |
| When you sell an ETF or stock, the IRS treats the capital gains (or losses) the same.
*You may pay short-term or long-term capital gains tax depending on how long you held the shares. |
|
| Stocks and ETFs can be equally risky in that their relative risk depends on which stock and ETF you are investing in. An ETF that mimics a volatile sector like oil and gas can be just as risky as a high-volatility stock.
*Figure out your risk tolerance, or how much risk you’re willing to take on, before selecting investments. |
Bonus: How are ETFs different from mutual funds?
ETFs and mutual funds are both made up of a collection of stocks. However, ETFs trade directly on an exchange like stocks during open market hours, while mutual funds (a type of index fund) only trade once per day. ETFs are generally considered more tax efficient than mutual funds, though both have their benefits.
How to buy ETFs on Public.com
To buy ETF shares on Public.com, you must first fund your account. You can do this through an ACH deposit or using a debit card.
When trading ETFs and stocks on the Public app, pay attention to Safety Labels. The app notifies users with a label, if an ETF or a stock has attributes that may make it riskier than other ETFs or stocks on the Public app. This helps investors make an educated decision before they place a trade.
If you want to get down to the nitty gritty, check out Public’s advanced stock and ETF data. These insights are available to Premium members on Public alongside guidance from Morningstar experts
Pros and cons of investing in ETFs vs. stocks
When is it better to invest in ETFs, and when should individual stocks take precedence?
The reality is that you can invest in both. However, it’s important to know the pros and cons associated with each option (there’s nothing more empowering than being an informed investor!).
ETFs |
Stocks |
|
Pros |
ETFs are easy to trade because they can be traded using online brokers, and you don’t need a full-service broker or to interact with a particular company that runs your brokerage account to make your transaction. Investors may like ETFs if they want to invest in a broad sector, or are less interested in specifics at the company level. By investing in ETFs on the Public app, you can get a feel for how entire indexes move over time. Sign up and add ETFs to your watchlist or invest in the ones that speak to you. Investing in a sector rather than a particular company could make you less susceptible to unforeseen events at a company that could hurt its performance (like a scandal or departure of a top executive) while the rest of the sector shines. |
Stocks tend to favor investors who are willing to put in the research needed to understand individual stocks and the factors that may influence performance
You might also like the idea of investing in specific companies and leaders you believe in. Some single stocks have the potential for higher returns over a period of time. Diversification can lower returns (though it also may reduce risk). |
Cons |
ETFs are not customizable and you may be investing in companies you don’t want to buy shares of.
Some ETFs have high expense ratios (or the fee for owning shares). Some ETFs are riskier than others. Just because the basket is full of different stocks does not mean the diversification strategy is set in stone. An industry-based ETF may experience a downturn if the specific industry it’s based on is in a bind. |
Investing in individual stocks limits diversification. With fewer types of stocks in your portfolio, you may carry additional risk.
It is difficult to assess the long-term viability of individual stocks. (If it were easier, we all would have gotten in on today’s blue chip stocks like Microsoft or Amazon when they first went public.) |
Bottom line: ETFs and stocks open up your investment options
ETFs and stocks both offer accessible entry points into the market—but just happen to carry their own nuances. Many investors prefer to build a mix of both in their portfolios since they each have their advantages. At the end of the day, it’s about understanding their similarities and differences and how one or both can fit within your personal investment strategy.
FAQs about ETFs vs. stocks
What is the main difference between stocks and ETFs?
The main difference between stocks and ETFs is that stocks represent shares of individual companies while exchange traded funds (ETFs) are a collection of stocks.
Why some ETFs may not be right for some investors?
Some sector or specific strategy ETFs may not be right for all investors because they may be prone to more volatility than broad index ETFs or mutual funds. This may mean there’s potentially greater opportunity for growth, though returns are never a given in the stock market.
Are ETFs good for beginners?
ETFs may be a good investment option for beginners because they offer diversification and a hands-off approach. They also trade during market hours similar to stocks.
What types of investments do ETFs offer?
Depending on the fund at hand, an ETF can represent baskets of common stock from various companies, bonds, crypto derivatives, and more. ETFs can also come in the form of equity index, bond, balanced, commodity, currency, real estate, volatility, leveraged, and inverse ETFs.