The world of investing can feel like learning a new language, especially when everything is explained in financial jargon. Words like stocks, shares, ETFs, and mutual funds are often used in similar contexts, but lead to different vehicles for your investments. So, what is the difference between stocks, shares, ETFs, and mutual funds?
Stocks, shares, ETFs, and mutual funds are all common investment terms, but they represent different avenues for your financial growth.
- Stocks and shares, terms that are often used interchangeably, represent your units of ownership in a company.
- ETFs and mutual funds are collections of investments, like stocks or bonds, that are bundled into a single product that you can buy into.
In this blog, we’ll go into more detail about each of these investment terms, the key factors involved in their differences, and how to choose the right vehicle for your goals.
What is The Difference Between Stocks and Shares
The terms ‘stocks’ and ‘shares’ both refer to the units of ownership in a company. They’re often used interchangeably, but do have slight differences in their meanings. ‘Stock’ is often used as a more general term, describing the ownership in multiple companies at one time. ‘Shares’ are the portions of ownership in individual companies that your stock is broken down into.
Think of shares like taking a slice out of a cake. This slice, a small portion of the company’s whole, is now yours, and you’ve become a shareholder. Your stocks are the collection of all the slices of cake you’ve taken from different companies.
The Difference Between ETFs and Mutual Funds: Which One Should You Invest In?
The terms ‘ETFs’ and ‘mutual funds’ do refer to different avenues of investment, but have similar characteristics. Both methods represent a pool of individual investments, like stocks or bonds. This means that both exchange-traded funds (ETFs) and mutual funds often offer a more diverse portfolio than a single share or bond.
ETFs and mutual funds also have some differences, however. These differences, and your preferences between them, will decide which of the two methods is best for you, your lifestyle, and your budget.
| Key Differences | ETFs | Mutual Funds |
| Management | Passively managed and makes a profit based on the performance of a particular index. | Run by an active fund manager and a team of analysts who assess the market. |
| Making Trades | Can be traded throughout the day, like stocks, with the price depending on supply and demand. | Executed once a day, with all investors on the same day receiving the same price. |
| Minimum Investment | No minimum investment, and they are purchased based on the share price. | The majority have a minimum investment, but this is typically a fixed amount that doesn’t depend on share price. |
Risk, Liquidity, and Diversification: Key Factors to Compare
When choosing between stocks, ETFs, and mutual funds, you’ll need to understand how each one differs in important factors: risk, liquidity, and diversification. These three things can significantly impact the stability of your portfolio and will affect how easily you can access your money if needed.
Risk
An investment’s level of risk refers to the chance that your investment will lose value or perform differently than expected. Your higher-risk investments might offer bigger returns, but you have more potential to lose your money.
Individual Shares
Shares are typically considered higher risk because they rely on the performance of a single company. The price of a company’s shares can change based on its earnings, the current attitude of investors (market sentiment), or even current news coverage of the company.
ETFs
ETFs are generally more stable than a single share because they cover a range of companies, all of which will perform differently in the market. They still offer moderate risk, however, as they’re still subject to the risks and fluctuations of the underlying holdings.
Mutual Funds
Mutual funds are often more moderate to low risk because they’re much more diverse. They’re designed to reduce your exposure to the risk of one particular asset or sector, choosing investments with a variety of risk levels.
Liquidity
The liquidity of your investments describes how quickly and easily you can convert them into cash without affecting their price. Highly liquid assets can be sold almost immediately, while less liquid assets will take more time to access if you need them.
Individual Shares
Stocks are highly liquid, meaning you can buy or sell stocks instantly during market hours. You’ll also often get a near-immediate settlement, so you can use your extra earnings if you need them unexpectedly.
ETFs
ETFs are also highly liquid. They’re traded just like stocks, and can be bought or sold during trading hours.
Mutual Funds
Mutual funds are considered a little less liquid than other investment options. They’re only traded once a day after the market closes, which can delay your access to your money.
Diversification
Diversification describes the process of spreading out your investments across a number of different asset classes, sectors, and geographical regions. A well-diversified portfolio can help lower your overall risk and help you get a more consistent return over time.
Individual Shares
Stocks offer no built-in diversification. In order to spread your risk, you’ll need to buy a variety of individual shares, but this will require more time and research to be effectively secure.
ETFs
ETFs are naturally diversified, with a single ETF exposing you to many companies, sectors, or asset classes in a single purchase.
Mutual Funds
Mutual funds are also more diverse by design, but this will depend on the strategy used by the fund manager. The involved professionals will be skilled in maintaining a range of assets, so the risk is often taken out of your hands.
Stocks and Shares, ETFs and Mutual Funds Comparison Summary
Ultimately, if you want to be able to access your money quickly and are comfortable with higher levels of risk, stocks and ETFs are likely to suit you better. Mutual funds are a bit more hands-off, more diverse, and often less volatile, so they might be a better option if that’s the investment strategy you prefer.
Risk, liquidity, and diversification should always be weighed against your budget, risk tolerance, and your desired investment timeline.
How to Choose the Right Vehicle for Your Goals
Choosing between stocks, ETFs, and mutual funds is about finding the right fit for your financial journey and goals, not just knowing how they work. We each have different targets, timelines, risk tolerance, and desired levels of involvement, which all play a huge part in determining which type of investment is the best for you.
Financial Goals
When deciding on an investment strategy, you’ll need to decide what you’re aiming for.
Are you investing to:
- Accumulate wealth?
- Generate a consistent income?
- Preserve the value of your current capital?
Each vehicle of investment will serve different end goals. For example, ETFs are a great option for both growth and income generation, while stocks are more focused on long-term growth through the appreciation of capital.
Investment Timeline
Your choice of strategy will be influenced by how long you plan on investing. More liquid assets, like ETFs, offer more flexibility and are better suited to short-term plans. Mutual funds, on the other hand, are more suited to those looking for a long-term plan, with greater compound growth on offer.
Risk Tolerance
Your choice of investment will also depend on how much market volatility you can endure without panic selling. If you think you can withstand fluctuating values and can stick with your investment in the down periods, you might prefer individual shares.
Alternatively, mutual funds with a conservative strategy or diversified ETFs might be a safer option if you think you’re going to be more reactive to value fluctuations.
Control And Management
Deciding how involved you’d like to be in your investments daily can also help you to decide which avenue to go down. If you’d like to be more hands-on, with research and strategy playing a big part, then individual shares or ETFs might be best. If you’d prefer to take a step back and let someone else handle your money, mutual funds controlled by a fund manager are probably the way to go.
Take a look at your current knowledge level about each of these investment vehicles and assess the work you’d need to put in to get a valuable return. Your willingness to stay up to date on trends and market news will also have an influence on your choice.
Choose The Right Investment For You With STARTrading
Investing can seem like a foreign language when you first get started, with each avenue presenting its own risks and benefits. Whether you’re aiming for long-term growth, a steady income, or simply looking for a new side hustle, knowing what’s available to you is the first step.
Now you’re armed with the right information, why not get started? Learn more from the experts here at STARTrading, and choose the right investment option for your goals, risk tolerance, and timeline.
Book your place on one of our swing trading courses and take control of your financial future with STARTrading today.
