Investing In Stocks Vs Investing In ETFs – Which Is Better?

When it comes to online stock market investing, you can pick from many financial instruments. Two of the most popular choices are stocks and ETFs. Both are incredibly different and can be opted for based on your financial goals.

When should you invest in stocks?

Stocks have the potential of outperforming the benchmark or an asset class. While the entire industry dips, one company may have brilliant results that skyrocket its share price.

Here’s where the concept of stock picking comes into the picture:

Your research and experience might give you some insights on a company’s performance, separate from the industry performance. These instances require an in-depth analysis to spot mispricing and typically occur when the returns within an industry are widely distributed.

The retail industry is one such industry where the returns may vary widely. The industry is so widely diversified and essentially runs on consumers’ subjective preferences, making it an ideal industry for stock picking. Taking advantage of the stocks that deviate from the average can give returns that outperform the average industry performance.

When should you invest in ETFs?

Instead of investing in a single stock, you can invest in many stocks through exchange-traded funds – ETFs. The basic principle of investing is to create a diversified portfolio, and an ETF does precisely that. It saves you the time and research needed to pick various stocks to create a well-balanced portfolio. You can simply invest in an ETF and get the averaged returns from the collection of stocks.

An ETF reduces your risk considerably, so ETFs would be a better option for you if you have a low-risk appetite. However, it is integral to note that investing in ETFs comes at a price. While ETFs have lower expense ratios than trading a bunch of individual stocks, ETFs themselves charge a trading fee that could be higher.

Are you thinking of going bearish?

ETFs largely depend on the market’s liquidity and might not be ideal for a bearish stance.

Since a professional manages the ETF, you don’t have the freedom to decide which stocks form the ETF. This could also be considered an advantage if you do not have the time to regularly put in the required research and gain knowledge about the current market situations.

What are your goals?

Based on your financial goals, risk appetite, and personal preferences, you can opt for investing in ETFs or stock. Invest in an ETF to lower your contribution towards research and lower your risk. Invest in individual stocks using your analytical techniques to find the right stocks and save on transaction costs.