Stock trading has always been popular, and with the rise of ETFs, many traders have jumped ship from trading stocks to ETFs, claiming that ETFs may be better and safer. But is there any truth to this, and how can one compare the two products? It also begs the question – which one should I, then, trade?
Before we begin delving into comparing stock and ETFs, you can first have a look at the stocks and ETFs you can trade in Singapore on Saxotrader.
What are stocks and ETFs?
To make the decision between investing in stocks and ETFs, all traders should first know the definitions of the two.
A stock is a share in the ownership of a company. When you buy a stock, you buy a small piece of that company. It is one of the most common forms of trading and investing, and stock trading is done on the stock market.
ETF stands for Exchange-Traded Fund, and it is a basket of assets – such as stocks, bonds, indices, and even commodities – that is bundled together based on a shared characteristic, such as the sector they represent, the size of the company from which the shares are issued, geographical location, and so on. ETFs can also be bought and sold on stock exchanges.
What stocks and ETFs have in common
To begin with, we can examine what stocks and ETFs have in common, and it is the potential to profit.
One of the main benefits of trading either stocks or ETFs is that you can use it as an avenue of income. If you pick a stock or ETF that grows in value, you can slowly accumulate a lot of money. Of course, you may also incur losses in capital if the stock or ETF price decreases. But if you have a good eye and do your research before purchasing an instrument, you have a good chance of growing your wealth.
The benefits of trading stocks over ETFs
Now let us examine the benefits of trading stocks over ETFs, and why some people may prefer to trade them.
The first benefit of stocks over ETFs is that stocks are relatively easy to trade, and they can sometimes be much clearer when it comes to beginner-trading. You can buy and sell individual stocks online on stock exchanges, and many brokerages will allow you to do so with no commission fees. When you buy and sell a stock, you know what exactly you are buying, and you can easily do research on the company whose share you are purchasing.
Secondly, when you buy individual stocks of companies, you can have a fair bit of control over your investments. When you buy a stock, you can choose to sell it whenever you want during market hours, provided there is sufficient liquidity in the market. When you trade stocks of large-cap companies where there are always shares in circulation, you can very easily buy and sell whenever you want.
What are the benefits of trading ETFs?
On the other side of the coin, there is a pretty strong case for investing in ETFs as well. ETFs have experienced a meteoric rise in popularity in recent years, and for good reason.
Firstly, ETFs are a basket of securities or assets, meaning they are automatically diversified. When you buy an ETF, you are not buying an individual stock, but a bundle. This means that even if one asset goes down in value, the others might go up or remain the same, minimising your risk of incurring great losses. Not only can it help to mitigate your risks, but it can also help you gain exposure to foreign markets, indices, and products with just one transaction.
Another benefit of ETFs is that they often have lower commissions and other management fees than with stock trading. Of course, the actual amount that you will have to pay will depend largely on the broker you choose to trade with. But generally, with ETFs, brokerage fees are often lower, which means that you will be able to keep more of the capital you earn if you do manage to profit from market price movements.
Finally, ETFs tend to be more tax-efficient than stocks. Depending on the jurisdiction, ETFs may not be subject to the same capital gains taxes as stocks. This means, once again, that you will be able to keep more of the money you earn if you do manage to profit from market price movements.
How to trade stocks and ETFs
Knowing the unique benefits of each product, traders should also consider the ways they can be traded, as it may or may not align with your trading strategies and preferences.
When it comes to stocks, many say that the best approach is to start with a small amount of money and buy shares in companies you are familiar with. If you can, try to hold onto your stocks long-term, giving you the best chance of making money.
With ETFs, you can either trade them yourself or invest in a managed fund. Managed funds are run by professional investors who will choose the ETFs for you. ETFs are also suitable for long-term holding.
The risks associated with stocks and ETFs
When choosing between stocks and ETFs, it is also necessary for traders to understand the unique risks associated with each product, so that they can be aware of what they are getting into when they begin investing.
When you trade stocks or ETFs, there is always the risk that the company will go bankrupt, and the shares you are trading will cease to hold any value. This could affect you immensely whether you are trading individual stocks or a bundle of stocks. Admittedly, ETF traders may have more of an advantage here, as bundles of assets are not limited to stocks, meaning that if certain stocks underperform, there may be other assets in the basket that can minimise any losses.
There is also the risk that the stock market will crash, which again will affect both stock and ETF traders. It can happen for various reasons, including economic downturns, natural disasters, and political instability. In these cases, all the stocks in the market will depreciate suddenly, causing your portfolio to take a big blow if you’ve only invested in stocks.
Another risk to consider is that of fraud. There have been cases of people losing capital because they were tricked into buying shares in a company that doesn’t exist. If you are going to buy stocks, make sure that you only deal with reputable companies.
So, which is better – stocks or ETFs?
After reviewing the pros and cons of stocks and ETFs, the answer to this question depends on your circumstances. If you prefer investing in individual companies with more freedom over when and where to trade, stocks might be a better choice, while ETFs might be the way to go if you are looking for diversification and lower fees. Ultimately, it is up to you to decide which investment vehicle is right for you by evaluating your risk tolerance and trading preferences.