Stocks vs. Exchange-Traded Funds (ETFs)

Which Should You Invest In?

Updated: June 13, 2024
Matt Crabtree

Written By

Matt Crabtree

CompareBanks is reader-supported. When you click through some links on our site, we may earn an affiliate commission. Learn more

Stocks and exchange-traded funds (ETFs) can help you build a solid investment portfolio. The former provides fractional ownership in a company. It can perform phenomenally over time, but it can fluctuate massively and may be volatile in the short term. 

ETFs are a collection of assets, often stocks, bonds, or a mix of the two. They provide investors with indirect stakes in all assets owned by the fund, are less volatile than stocks, and reduce investment risks. However, they typically earn lower returns. Both options come with their pros and cons.

This rundown on stocks vs. ETFs can help you pick the right one for your own investing journey.

At a Glance: Stocks vs. Exchange-Traded Funds (ETFs)

ETFs and stocks are similar in many ways, but there are also crucial differences between the two:

Investment diversityNo Yes
Asset typeIndividual shares in a specific companyPool of several investments
Portfolio managementPersonal Professional
Management feesNo feesBrokerage fees
Liquidity More liquidLess liquid
VolatilityMore volatileLess volatile
Traded on exchangesYesYes
Investment risk Higher. No diversification Lower due to security diversification
Investment selectionFull control of stock selectionTypically no control
Role of market makerIntermediates between buyers and sellers to provide short-term liquidityFull management of the fund’s capitalisation 
Capitalisation Nearly fixed over long periodsCan increase and decrease each day depending on creation or redemption transactions

The main advantage of ETFs vs. stocks is the investment diversity they provide. ETFs consist of a pool of several investments, which can be either stocks or bonds (or a mix of them), but also other investment types. 

ETFs are less volatile than stocks and have a lower investment risk due to security diversification.

However, ETFs are typically bought through brokers and are professionally managed. This option doesn’t offer the opportunity to select your investment either — you will invest in everything the ETF contains.

With stocks, you have full control over investment selection. Portfolios can be managed professionally by brokers if you’re a beginner, but experienced investors can also choose to manage their own portfolios. This option cuts off brokerage fees and increases your control over the investment. 

The main drawback of stocks is their higher volatility due to a lack of diversification. Capitalisation is nearly fixed over long periods, however, whereas the capitalisation of ETFs can increase or decrease each day. 

Stocks vs. ETFs Overview

What Are Stocks?

Stocks are equity securities that represent ownership in a publicly traded company. These shares typically become available when companies need to raise large sums of money for expansion and can earn their owners a high profit if the company does well. 

Stocks entitle their holders to fixed dividends whose payment takes priority over that of ordinary share dividends, guaranteeing investors a return if the company does well. When stocks are chosen wisely, they can earn investors high profits. 

However, start-up stocks can be volatile, and holders can lose their investment if the company fails to perform or goes bankrupt. 

Pros and Cons of Stocks

Stock Advantages 

✔️ Stocks stay ahead of inflation. Historically, stocks have proved to yield generous yearly returns higher than the general inflation rate. Even if their value temporarily drops, stock returns tend to grow in time. 

✔️ Ideal for both day traders and buy-to-hold investors. The former takes advantage of the short-term trends, buying low and then selling high. The latter don’t expect immediate returns but wait for the companies and dividends to appreciate in value.

✔️ Suitable for beginners. Stocks are some of the easiest to buy assets. You can purchase them through a broker, financial planner, or even online apps like eToro or Capital. Small business owners may even be able to invest through their businesses. 

✔️ Low initial investment. New investors generally have the possibility to keep the initial investment low when buying stocks. Aside from commission-free retail brokers, most financial planners or apps give investors the possibility to buy fractional shares if the stock they want to buy is too expensive. 

✔️ Easy liquidity. Holders can sell the stocks they own at any time. You can turn assets into cash quickly and typically with low transaction costs.

Stock Disadvantages 

❌️ Relatively high risks. Stockholders own shares in a particular company, meaning that they could lose all funds invested if the company goes down. If you can’t afford to lose an initial investment, buying ETFs or bonds could be a better choice.

❌️ Time-consuming investment. If you don’t want to use a broker and decide to buy stocks on your own, you must learn how to read financial statements and annual reports and follow your company’s progress and developments constantly. You must also research the company before investing to determine how profitable it is and monitor the stock market to determine when to sell.

❌️ Profits are taxable. By investing in stocks, you become a shareholder within a company. This could give you tax relief if you sell the stocks for a loss. However, if you sell them for a profit, you must pay capital gains tax on the amounts earned.

❌️ Emotional rollercoaster. Stock prices fluctuate constantly, and if you’re not an expert investor, you could risk selling low out of fear. The best thing to do is to monitor stock prices regularly and be patient. 

What Are ETFs?

ETFs (exchange-traded funds) are funds that pool together capital from multiple investors to purchase a basket of securities. They are generally made up of a selection of stocks or bonds but can also include commodities and other asset types. 

At first glance, ETFs look similar to mutual funds, but a mutual fund is only priced once per day after the market closes, whereas ETFs can be bought and sold throughout the day. In this aspect, ETFs are more similar to stocks. 

Generally, though, you can expect ETFs to perform similarly to index funds, demand and supply in the market causing ETF prices to vary based on the value of its underlying securities. 

Pros and Cons of ETFs

ETF Advantages 

✔️ Investment diversification. A single ETF gives exposure to a group of market segments and equities. It tracks a broad range of stocks and other security types, reducing the risks for investors. 

✔️ Trades like stock. Even though ETFs are made up of a group of securities, they have the same trading liquidity as stocks. You can purchase ETFs on margin, sell them short, and benefit from the net asset value at the end of the day. However, because they are managed professionally, ETFs are considered less liquid than stocks.

✔️Automatic reinvestment of gains. An advantage of the professional management of ETFs is that dividends are reinvested immediately. ETF owners are minimally involved in portfolio management. 

✔️ Limited capital gain tax. ETFs tend to realise fewer capital gains than actively managed funds and are more tax efficient than similar investing options.

ETF Disadvantages 

❌️ Costs could be higher than stocks. ETFs are generally managed by brokers or financial planners, which means investors have to pay brokerage fees. Buying ETFs could also be more expensive than investing in individual stocks. 

❌️ Lower dividend yields. While ETF investments come with lower taxes, the tax is actually lower because they produce lower dividend yields. 

❌️ Leveraged ETFs can lose value fast. There are different ETF types, and if you invest in a leveraged ETF, the fund could lose value quickly depending on market factors. This happens because this ETF type is a speculative investment that can vary significantly in overall return on each underlying security. 

❌️ Partial shares may not be available. Depending on the brokerage firm you use, you may not be able to buy partial shares on ETFs. Due to this factor, you may have to invest in start-ups or companies with a less-than-stellar financial history, increasing the investment risk.

When to Invest in Stocks?

Stocks are an excellent investment option for people who have money they won’t need for a few years. 

This investment type gives anyone the ability to start small. You can manage the investment yourself through multiple apps or online brokerage services, which have £0 or very low commissions. 

Stocks also give you the ability to invest in fractional shares, meaning that you can begin purchasing with as little as £100. 

However, you should not invest in stocks if you don’t have the time –— or knowledge — to research the market before investing. You may also want to consider other investment types if you want fast returns. Stocks may take years to provide capital gains. 

When to Invest in ETFs?

ETFs offer diversification and are a good choice for people who don’t want to put all their eggs in one basket. 

They can be traded like stocks and don’t require large amounts of capital to begin. Yet, they are more expensive than stocks. 

Managing the investment portfolio is also more expensive since ETFs are typically bought and sold through intermediaries that earn commissions.

Similar to stocks, ETFs may take a while to generate returns, and dividends are typically reinvested automatically. This is why you should have some industry knowledge, or you might risk choosing the wrong broker.

Top Stocks and ETFs Investing Platforms

Whether you decide to invest in stocks or ETFs, choosing the right investing platform is crucial. The two alternatives below are great options for different levels of investors.

1. Plus500

Founded in 2008, Plus500 lets users trade via Contracts for Difference (CFDs) and is a more suitable choice for investors with expert-level experience.

CFDs are different from traditional stocks or ETFs trading, but they can yield higher returns on investments. 

80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

However, they are also more volatile than traditional investments, and you may risk bankrupting yourself completely in a single trade. 

2. eToro

One of the leading names in the online trading space, eToro offers access to a variety of stocks and ETFs.

Stocks are accessible via London Stock Exchange (LSE), while ETFs can be found in a separate category within the app.

Creating an eToro account is easy, but the platform requires a minimum deposit of $50 to get started.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. {etoroCFDrisk}% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

Stocks and ETFs aside, eToro also gives investors the ability to trade cryptocurrencies, Forex, indexes, commodities, and dividends.

Bottom Line

Stocks and ETFs offer similar investment opportunities, but essential differences between the two make the former more suitable for experienced investors. ETFs are passively managed by the holder, but you should still pay attention to choosing the right broker.

Related Guides:


Is it better to have ETFs or stocks?

Are stocks and ETFs taxable?

Related Articles

How to Invest in the S&P 500
The S&P 500 is a powerful barometer for the state of the US economy. It brings...
What Are Socially Responsible Investments?
If we're being honest with ourselves as investors, how morally reprehensible the...
What Are Municipal Bonds?
Whether you're new to investing or a seasoned pro, it helps to know what kinds of...
How to Invest in Whisky
Alternative investments such as whisky can a great way to diversify your portfolio....