If you are a beginner in stock investments, one of the concerns you might have is whether to invest in regular (single) stocks or ETFs. This is totally understandable since it is not an easy choice to make; how can you invest in stocks that are likely to do well? When investing in stock, the goal is to mitigate any risk that might occur in the process. This article clearly points out why investing in Exchange Traded Funds (ETF), might be a far better choice.
What is ETF? (Exchange Traded Funds)
Since you are just getting acquainted with stock investment, you may be wondering what ETF really is; ETF, from the name, is a fund that trades on exchanges. In other words, ETFs can be traded on a stock exchange just like you can trade a regular stock.
Stock represents shares within a single company with just a single package whereas ETF is a basket of securities that consists of different and diverse investment funds known as holdings. These holdings include stocks, commodities, bonds, and other securities. Investing in ETFs gives you a bundle of assets to buy and sell, thus diversifying your investment portfolio while mitigating potential risk and exposure.
Advantage of ETF over stock investment.
The one advantage associated with investing in ETF is reduced risks. This is because you are making diversified investments in different entities. And the good thing with this is that it is very unlikely that all of them will lose their value. There is a significant risk associated with investing in a single stock, the kind that you will call “putting all your eggs in one basket.” In a case where the company loses its value, then your stock value is bound to fall. And there is no security or other investment that you can use to nullify the loss.
Apart from the ETF nature of diversified funds aimed at minimizing risk, here are some other reasons why EFT is recommendable;
- Lower management and operational cost- generally, ETF offers a lower management cost as compared to other forms of stock trading.
- Better tax efficiency
- Transparency – ETFs disclose their holding to their investors on a daily basis to ensure that you know what you are investing in.
A Practical Example
A practical example of bringing a clear comparison between stock and ETF is: If you have $ 1000, and want to invest right now in the stock exchange so that it is multiplied into several thousand, you can either opt for stock investment or ETF.
With stock investments, you will use the whole $1000 at once, betting everything on one card and buying a single share with a total amount of a thousand dollars. With ETF, you can invest in around 100 stocks using the $1000. This way, you are able to mitigate the risk so that in case one or two company values fall you can still count a gain in the others
Conclusion, Stock trading for beginners: Why you should invest in ETFs instead of buying single stocks
To conclude, stock investment is an idea that might occur to you at any time. As a stock trading beginner, it is recommended to do proper research on the different types of stock investments to opt for just like any other form of investment. The main goal of stock investment is always to minimize risk and gain value from your investment. ETF proves advantageous because it will help you minimize risk while charging a very low management fee. You can clearly see that ETF is definitely worth it.
