At some point along your investing journey, you may have asked: "What's the difference between an ETF vs a stock?". If so, you're in good company.

In this article, together we'll explore the ins and outs of both ETFs and stocks. We'll look at the nature of each investment, their main differences, plus some insights on investing strategies for each. No matter where you are on the journey to Financial Independence, we'll make this easy and simple.

What are ETFs?

Let's start with that investing buzzword you may have heard a lot lately: ETFs (exchange-traded funds). Imagine you want to buy a piece of every cool tech gadget out there, but instead of picking each one, you buy a big box that has a little of everything inside. That's what an exchange-traded fund is in the investing world.

An exchange-traded fund is a type of managed fund but slightly different from index funds and mutual funds. When you invest in ETFs, you're putting your money in a mix of assets. ETFs can be traded on a stock exchange. This means you can buy and sell them, just like you would with any stock. Ultimately, ETFs allow you to invest in a collection of stocks, pooling them together.

So why are so many investors buzzing about exchange-traded funds? Well, they offer various options, including:

1. Passively managed ETF. These ETFs are pretty chill. They follow an index without trying to outdo it.
2. Actively managed ETF. Here's where things get hands-on. With an actively managed ETF, there's a fund manager who decides which assets to buy and sell. The goal is to beat the market, and they adjust the fund to do that.
3. Exchange traded hedge funds. These are unique. They have plans and strategies in place. Their goal? To make profits, whether the market is smiling or frowning. This type of ETF is all about making smart choices.
4. Physically-backed ETF. With these, you're getting into something tangible. When you buy into one of these ETFs, you're getting a part of physical assets, like gold or silver.
5. Synthetic ETF. A bit different from the rest, a synthetic ETF doesn't own the actual assets. Instead, they use financial setups to behave like they do. They mimic how other assets perform. Instead of directly buying the items on their list (like stocks or bonds), synthetic ETFs have agreements in place with other parties to get the same result without owning the actual items.
6. Inverse ETF. An inverse ETF aims to earn money when a specific stock or index drops in value. So, if the stock or index goes down, this ETF will go up.

Depending on your investment goals, there are different factors to help you choose the right ETF for you.

Of course, nothing comes without its set of details to consider. When you hold an ETF, you might have to deal with things like an expense ratio. This is a fee you pay to the fund manager for overseeing the fund. And, if you sell your ETF for more than you bought it, you could face capital gains tax.

Yet, the appeal of ETFs as an investment option is undeniable for several good reasons. Whether it's a passively managed fund or an actively managed fund, these funds can be a suitable investment for many. They can cater to various risk tolerances, ensuring there's something for everyone. We'll talk more about that soon.

What are stocks (a.k.a. shares)?

Think of a stock like a puzzle piece of a company. When you buy a stock, you're buying a small piece of that company. The company might have thousands, even millions, of these puzzle pieces (or stock). So, owning stock means you own a small part of the bigger picture!

Investing in stock provides growth potential, especially when there is an array of stock market investing types in Australia. Because when the company you put your money into does well, it's a chance for your money to grow too. Stock can also provide a way to earn some money even without selling them. Through dividends, some companies share their profits with stockholders.

Since we've brought up dividends, note that ETFs provide dividends, too. As many ETFs allow investors to own different stocks, if these stocks pay dividends, ETF owners get a piece too. Just be aware of the factors that determine whether an ETF pays dividends.

Now, while there are upsides to investing in stocks directly, there's also a downside – stock prices can change quickly. One moment the price is up, the next it's down. It's unpredictable, which can be stressful for some investors. Ultimately, owning a slice of the company doesn't mean you can make decisions for the company. The company will make decisions that they feel are best, even if you disagree.

What are the key differences between ETFs and stocks?

There are a few distinct differences between an ETF and a stock investment. Here's an overview of those differences:

	ETFs	Stocks
Ownership	When you buy an ETF, you're grabbing a piece of multiple assets, be it stocks, bonds, or others. Think of it as a bundle.	Buying a stock means you own a slice of that specific company. It's a straightforward way to invest in a particular company you believe will eventually grow.
Diversification	They are a way to spread your money over many investments.	Each stock you buy represents one company.
Risk/Volatility	ETFs generally provide more stability. By spreading your money in many places, you reduce the impact if one of them hits a rough patch.	Stocks generally carry more direct risk. Your money's fate is tied to how that single company performs.
Fees	There's a small fee, known as an expense ratio, for the service of bundling those investments. Plus, you might encounter trading fees, but they're usually on the low side.	Usually, you'll face a fee every time you trade – that's when you buy or sell a stock. It’s charged by the broker as their service charge.
Liquidity	They're easy to trade, just like stock. You can buy and sell during market hours.	How easily you can buy or sell a stock depends on its popularity and the market conditions.

It pays to learn the differences between ETFs and stocks. But remember that every investment type has its pros and cons. Your job is to find what's suitable for you.

Different investing strategies for ETFs vs stocks

You may be well aware by now that there are different ways to invest, such as active and passive investing. Imagine two friends: one loves to spend a lot of time buying and selling based on trends (active investing). The other prefers to chill and let their investments grow slowly over time (passive investing). Also, some investors are in for the quick game (short term), and some are marathon runners, looking years ahead (long term).

Well, different types of investments are used to implement these investing strategies. What, then, are the best investing strategies that suit ETFs and stocks?

ETFs (exchange traded funds)

Passive investing: When you invest in ETFs, you're often hopping on the passive train. A lot of ETFs mimic something called an index. There's one that tracks the performance of the ASX 300 index, for example. So when you buy that ETF, you're not trying to outsmart anyone; you're just going along with the flow of the market.

Long term investing: Let's say you want to put your money somewhere and not stress about it daily. ETFs can be the right option for you. They're designed to be a long-haul investment. As time goes on, the overall market tends to go up. And when it does, your investment in that ETF might grow too.

Stock (common stock)

Active Investing: For those who like to roll up their sleeves and dive deep, direct stock might be the way to go. You're picking specific companies, hoping they'll do better than others. It's a bit more hands-on, and you might work with a broker or trade on your own. The goal is to outperform the market. With stock, there's no set it and forget it. The thrill of finding a gem is what some investors live for.

Short term Investing: For those who enjoy the thrill, stock can be a short-term game. Buy a stock today and who knows, maybe its price may rocket up tomorrow. It’s a dynamic world, filled with ups and downs. This investment strategy is unpredictable, and it's not for the faint of heart. But some love the excitement of the game.

Whichever investment strategy you pick, there are pros and cons. Choosing a suitable investment type depends on your preferences. Whether you want to dive deep into individual stocks or explore the world of ETFs, it comes down to your risk tolerance and how you want your money to move.

Factors to consider when deciding between an ETF vs a stock

Let's think of it this way: deciding between ETFs vs stocks can be difficult without some factors to guide you in your decision-making. Every investor's situation is unique. So, let's explore some factors to consider which investment type clicks for you.

Investment goals and preferences: What's your goal?

ETF: With an ETF investment, you're getting a mix. It's like buying a little bit from several companies at once. This gives you a broader exposure to the market.

Stock: Buying a stock means you're buying a piece of a specific company. You might have a desire to support that company because you believe in its mission or earning potential.

Investing Style: How involved do you want to be?

ETFs: Many ETFs are passive, meaning they try to match the performance of an index. It's a way of saying, "I trust the overall market."

Stock: This is where you roll up your sleeves and pick specific companies. It’s more active and involves more homework.

Amount to invest: How much are we talking about?

ETFs: Most ETFs allow you to start with a smaller initial investment. This can be an easier entry point for new investors.

Stock: The price varies – some stocks are expensive, and some are more affordable. It depends on the company.

Time commitment: How much time can you give?

ETFs: Investing in ETFs can be more relaxed with less time commitment. You buy them and can often let them sit and grow.

Stock: Investing in individual companies means keeping an eye on how they're doing. This can involve more time and attention.

Risk tolerance: Feeling adventurous or not?

ETFs: The risk is spread out because you're invested in several companies. If one isn’t doing great, others might be doing fine.

Stock: It's a bit more direct. Your investment's success is tied to the success of the company.

Remember, investing is personal. There's no one-size-fits-all approach. It's about understanding your own goals and comfort levels and then investing in what feels right for you. With the help of a broker or on your own, the key is to stay informed and make choices that align with your goals.

ETF vs stock — closing thoughts

Whether you're eyeing ETFs or stock (or both!) what works for one investor might not be the best for another.

Before you enter into any investment, it's essential to look before you leap. Investing, at its heart, is about making your money work for you. So, stay curious, ask questions, and always be on the lookout for more knowledge.

Happy investing!