Exchange traded funds, or ETFs, and stock shares both trade on stock exchanges. They are bought the same way through a stock brokerage account. But these two types of investment securities have significant differences. ETFs allow investors to invest in a wide range of asset classes that include stocks but are not limited to them.
Shares of common stock represent partial ownership of a corporation. If an investor owns shares of Apple, IBM or Home Depot, he is an owner in those companies and participates in their financial growth and profits. An exchange traded fund is an investment company that consists of a portfolio of assets or securities. Owners of ETF shares own a portion of that pool of assets.
Owning shares of stock means you own a single security. Each different stock is ownership in a different company. Owning shares of an ETF means you own a diversified portfolio. A single ETF can represent partial ownership of hundreds or thousands of individual securities.
The value of individual stocks is based on investor beliefs in the financial performance of the corporations. Stockholders in a company believe the company will be able to increase sales and profits, resulting in higher share prices and dividends paid by the company. An ETF is designed to track the value changes of an index or asset. For example, the SPDR S&P 500 ETF, stock symbol SPY, owns all of the stocks listed in the S&P 500 stock index and the fund will mirror the value changes of the stock index.
Individual stocks are available for companies in a wide range of industries and sectors. Some stocks will do better than their competitors and some worse. Investors must research the companies to determine investment potential. ETFs are available to let investor participate in a wide range of asset and security types. Stock ETFs track the major stock indexes and specific sectors in the market. Bond ETFs track diversified bond indexes for corporate, government and municipal bonds. Asset-based ETFs reflect the value changes in commodities like gold, crude oil, natural gas and agricultural commodities. International ETFs allow investors to invest in the markets of different countries.
Returns vary greatly among stocks. Apple stock went from $4.50 per share to over $250 in about 12 years. General Motors went from $20 per share to worthless in less than two years. Successful stock investing requires extensive research and forecasting. ETF investing allows investors to make diversified investments in market, sector or asset classes. The shares of an ETF will reflect the value changes of the selected index. ETF investors profit or lose based on their ability to select asset classes and market sectors.