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Investors have an array of options for investing in the stock market. Besides trading in individual stocks, which offer a share of ownership in a specific company, investors can also invest in Exchange Traded Funds(ETFs). ETFs are a collection of securities that are traded on a stock exchange. Read our article to understand the differences between ETF vs Stock

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ETF vs Stock 

The following are the differences between ETF vs Stock

ParametersExchange Traded Fund (ETF)Stock
MeaningETF is a basket of securities consisting of diversified investments like stocks, bonds, commodities and other securities. Stocks are also called shares issued by the company to raise funds. Stock represents a part of ownership in the company. 
DiversificationMultiple securities held by the ETF portfolio provide diversification to investors. An investor has to pick many stocks to bring in diversification.
RiskETFs are less riskier than stocks as they reduce risk by diversification across market securities. The risk in an individual stock increases as the investors cannot escape if that particular stock crashes or falls significantly. 
Liquidity The liquidity of the ETF depends on the index it tracks and the portfolio composition. For instance, if the ETF portfolio is trading in blue-chip companies with high volume, it will have high liquidity. It is comparatively easier to convert into cash.The liquidity of stocks depends on their nature. Stocks of blue-chip companies will be highly liquid when compared to midcap or small companies. 
Accessibility Investment in ETFs provides investors access across multiple sectors or industries based on the fund objective.Investment in individual stocks gives investors exposure to one particular sector or industry. 
Investment CostETFs are professionally managed portfolios by fund managers with a higher expense ratio than stocks. However, the expense ratio of ETFs is lower than other mutual funds. The investment cost in stocks is lower than in ETFs as it has lower brokerage. Investors have to manage their stocks by buying and selling on their own through the Demat account
Professional ManagementETFs are managed by professional fund managers. They ensure that the stock is maintained in its given proportion at all times. Investors have to select stocks based on their research and trade independently. However, this may lack professional management, which may help invest in multiple company stocks. 
Control on PortfolioETFs are passively managed funds, but fund managers still decide to buy or sell any fund unit. Investment in stocks provides investors with complete control of their portfolio where buying/selling is at their own research and analysis. 

Who Should Invest in an ETF?

While investing in Exchange Traded Funds (ETFs), defining investment goals and tenure is necessary. Based on investors’ goals, risk tolerance levels and investment horizons, they can pick the type of ETF to invest in. It offers diversification by investing in different asset classes like equity, bonds, commodities or other securities. Investors can choose the right ETF based on preferences and future goals.

Furthermore, ETFs are more suitable for a long term investment horizon. Moreover, ETFs are passively managed funds suitable for investors who do not have much time to manage investments. At the same time, if such investors seek exposure in equity at a low cost can consider investing in ETFs. 

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Who Should Invest in a Stock?

Investment in stock is suitable for investors who have experience and understanding of how the stock market works. Investors must stay informed on what’s going on in the country and worldwide. More importantly, such investors need to take tactical calls on the timing and purchasing or selling of each stock. Thus, stocks can be a good option if investors can meet these conditions and dedicate time. Also, they should be able to build a portfolio by investing in different stocks. 

Sometimes stocks also require investors to stay invested for an extended period to realise real growth. For instance, some stocks might give up to 100% returns or more over time. Investors need to understand that the stock market is volatile and can lead to substantial swings in the short term. Therefore, having the right pick for investment can help maximise growth in the investment portfolio. 

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ETF vs Stock- Which is Better?

Investing in ETF or stock entirely depends on the overall investment strategy. Investment in stock is ideal for investors who want the flexibility to build their portfolios. Also, they have had a good understanding and knowledge of stocks for a long time. Such investors are willing to take the risk for potential returns by trading in individual stocks. 

On the other hand, ETFs can be the ideal choice for first-time investors and experienced investors who do not have much time to monitor the stock market regularly. Also, ETFs are professionally managed portfolios where investors can build an investment portfolio by investing in different types of ETFs. 

Many investors prefer a mix of both in their portfolios as they both have their own advantages. Also, it is about understanding the similarities and differences between the two and how they can fit into the investor’s strategy. Moreover, there is no right or wrong when it comes to investing, and it is the selection of the right stocks or funds based on the investor’s financial objective, investment horizon and risk tolerance levels. Both are subject to volatility, and investors should do the necessary due diligence before choosing either.