ETFs and traditional shares are two investment types that are often compared to each other. From the comparison of ETF returns versus that of shares; to accessibility, liquidity and diversification; understanding the difference requires research.

But that research takes work.

It requires knowing where to start.

In this article, we'll share some information to help you dig deeper into understanding how ETFs stack up against traditional shares. We also discuss how to conduct useful research and what to look for.

What are the differences between ETFs and direct shares investing?

Sometimes, you can walk into a mega store and find so many choices you don't know where to start. Know the feeling? It can be a similar when you step into the investing world, especially if you're a beginner. There are a lot of options out there – stocks, ETFs, bonds, property and so much more.

Now, here's the thing. If you don't know what each investment is, you might end up picking something that isn't aligned with your circumstances or goals. That's why it's important to know the basics before you start investing. So, what are the differences between ETFs and direct shares?

What is an ETF?

An ETF (or exchange-traded fund ) is a type of investment you can buy and sell on a stock exchange, like shares in a specific company. Unlike shares, instead of getting a slice of one company, you get a stake in multiple companies. It’s like shopping in the stock market and grabbing a mixed basket of goodies all at once.

Here are some key features of ETFs:

1. Publicly traded : This simply means you can buy or sell ETFs on public stock exchanges, like the ASX.
2. Liquidity: Because ETFs are bought and sold on the stock exchange, they tend to be highly liquid. This means you're unlikely to have trouble selling your ETFs if you need to.
3. Diversity : Instead of having your money tied to a single company's success or failure, an ETF spreads it out. ETFs can contain all types of investments, including bonds, property and stocks.
4. Transparency : With ETFs, the portfolio holdings are disclosed on a daily basis, so you can see exactly what you own.
5. Lower costs : Management fees for ETFs, especially passively managed ETFs, are generally lower than other investments such as direct shares.
6. Dividends : Some ETFs give you a bonus in the form of dividends . It’s like a thank-you note for investing with them.

What are traditional shares?

So, traditional shares. As mentioned, when you buy a share, you’re buying a piece of a company. This all happens in the stock market.

Now, for the key features of traditional shares:

1. Ownership : When you buy shares, you own a part of that company. The more shares you have, the greater the value of your ownership stake in that company.
2. Dividends : Some companies share their profits with shareholders in the form of dividends.
3. Share price : This is the cost of a single share. Prices go up and down based on how the company's doing and what the general market feels.
4. Liquidity : Shares can also be liquid, particularly if they are listed on a stock exchange. The level of liquidity depends on how much demand there is from buyers and sellers.
5. Price volatility : The value of shares can go up or down over time based on company performance. If you hear the term Dow Jones, it’s a way to track how top companies are doing.
6. Ownership risks: When you own shares in a specific company, your investment success is tied to their success.

There has been a lot of talk about how ETFs compare with traditional shares. Simply put, while a share is a slice of one company, an ETF is a collection of many slices from different companies or different investment types.

Remember, every investor starts somewhere. Whether you're looking into ETFs or shares, learning about the different investment types is a step in the right direction.

Making informed investing decisions

Investing comes with its risks. You can never fully predict what will or won't happen. And when you're saving up for a holiday or retirement, it's important to make informed decisions. Going in blindly is unlikely to serve you well in the long run.

So, do your research. Start with considering your personal and financial goals and risk tolerance. Then, compare any information you find from your research against these factors.

Research is your friend

Investing without research is like trying to drive without a map. The stock market and ETFs have so much to offer, but to tap into them, you need to at least know the fundamentals. Whether it's how to invest in the stock market , understanding market price returns, or getting to know giants like Dow Jones, research helps you make informed choices.

Your goals and risk profile are your guide

Imagine you're setting out on a trip but without a clear destination. You could end up lost and in the middle of nowhere! It's the same with investing. Without clear goals, it's hard to know if you're on the right track.

Understanding your goals is essential. Are you investing for a short-term goal or building for your future net worth? Once you know, you can steer your investment portfolio in the right direction.

Equally important is knowing how much risk you're comfortable with. We all have different comfort levels when it comes to risks. Some folks like to play it safe, while others love a bit of a thrill. If big swings in share price make you nervous, you might want to be more cautious. Remember, there's no one-size-fits-all in investing.

The price tag on uninformed decisions

Jumping into the stock market or acquiring ETFs without being informed can cost you. We're not just talking money here, but also peace of mind. You might miss out on dividends, face liquidity risk, or even encounter the unexpected, like a black swan event . Think of Warren Buffett, a big name in investing. He doesn't depend on luck; he makes well-informed decisions.

The world of investing is exciting – from exchange-traded funds to shares and fixed income, ROI possibilities, and the expectation of increased net worth. But starting the journey without a clear plan can lead you nowhere. So, get to know yourself, do your homework, and make choices work for you.

How do I research ETFs and shares?

The stock market is a big marketplace. Whether you're eyeing individual shares or ETF shares, knowing what you're buying is important.

The good news is, there's no shortage of information out there. And if you know what to look for, you're likely to make smarter choices.

What are the different sources of investment information?

Here are some examples of where you can find information on the assets you want to invest in:

1. ASX and other stock exchanges: The ASX is like a hub for Australian investors. It's where companies and ETFs list their shares for public trading. By checking out the ASX or similar stock exchanges worldwide, you can get a pulse on what's happening in the stock market. You'll see share prices, market price returns, and more.
2. Broker's insights and tools: Brokers do more than help you buy and sell ETFs and shares. Many brokers provide tools and insights to help you understand the general market or specifics like how rates rise and the impact on investments.
3. Popular investing apps: There are also investing apps (such as Pearler ) out there that make understanding ETFs, ROI, and the like simpler. Some even give you real return ETF data, or updates when dividends are announced. For example, Pearler provides tools such as the Investing Frequency Calculator and Financial Independence Calculator to help you plan out your investments.
4. Financial news and trusted commentators: Financial news outlets are a treasure trove of information. You can get updates on the latest in the Dow Jones, potential liquidity risks, or market movements. Experienced investors like Warren Buffett also share their thoughts to give you a fresh perspective.
5. Annual reports and company statements: Companies and ETFs usually release annual reports. It's like their yearly score card. These documents have details on their performance, share price movements, and other nitty-gritty details. It's helpful if you're looking to dig deep into a specific company.
6. Fact sheets from ETF providers: ETF providers often release fact sheets and performance reports. They break down how the ETF shares performed, what's in the fund, and how the applicable index continues to move.

Your investing journey is all about gathering information, making sense of it, and then making decisions to help you achieve your investment goals.

What should I look for in each investment?

Now, let's explore the essential things to look at when you're eyeing an investment. Whether it's shares in a company or those popular ETFs you're hearing about, knowing these variables will give you a solid start.

1. Price and valuation metrics. When you hear the term "share price", it's simply how much one share costs right now. Valuation metrics give you a hint about whether that price is high, low, or just right considering how well the company's doing.
2. Dividend yields and histories. Dividends are like little bonuses some companies give out to their shareholders. The dividend yield tells you how much you can expect compared to the share price. If a company has a long history of paying out dividends, it's a good sign (but not a guarantee) they might keep doing it.
3. Historical and recent returns. This is about looking back. How has the stock or ETF performed in the past? It's not a crystal ball for the future, but it gives you an idea of what's been happening. This is a good time to note past performance is not a reliable indicator of future performance.
4. Cost/fees associated. Everything has a price tag, right? Some ETFs or managed funds might have fees, like regulatory fees, which can eat into your returns. Always check these out before buying.
5. Liquidity. Think of this as a quick check on how easy or hard it is to buy or sell your shares or ETFs. If lots of people are trading it, it's probably more liquid. If only a few are buying and selling, that could make it harder to sell when you want.

Strategic investing requires research. And you're in luck because the information is out there, waiting for you. You only need to gather the facts to make informed choices towards your investment goals.

Choosing between ETFs and shares

When you're looking at ETF returns versus traditional shares, there's a lot to take in. Remember, investing is a personal journey, and what works for your friend or neighbour might not work for you. It all boils down to your goals and risk profile. What are you hoping to achieve? And how much uncertainty can you comfortably handle?

With ETFs, you're spreading your money around in a basket of different companies or asset classes. On the other hand, traditional shares are about picking and backing individual companies. But here's the kicker: there's no "best" choice between ETFs and traditional shares. It's about what feels right for you. So, do your homework, think about your goals, and remember to check in with your comfort level when it comes to risks.

Investing is an adventure, and like any good journey, it's not about the destination but the path you choose to take.

Happy investing!