Stocks and ETFs, are there any difference? New investors sometimes get confused about it, both ETFs and stocks can be bought though the brokerage firm.
What is a Stock?
Stocks are fractional pieces of publicly traded companies. If you own a company’s stock, you own a piece of that company. When you own stock, you own shares, a claim on the company’s earnings and assets, but not the corporation itself.
This structure is good for investors (and companies) because it keeps investors legally separate from the company, preventing either party from liquidating the other party’s assets to remain solvent or for any other reason. With a publicly-held company, shares are traded on exchanges, allowing investors to easily enter or exit positions or to build a long-term position with a single stock or a portfolio of stocks. Selling these shares in the market is a way to recoup an investment and lock in returns.
What is an ETF?
An exchange-traded fund (ETF) is an investment fund that trades on a stock exchange along with stocks for individual companies. ETFs are flexible investment vehicles which purchase various types of assets to meet their investment goals.
They can track an index like the S&P 500, track a sector, represent a commodity (like gold, oil, or wheat) or sample a basket of stocks or bonds that meet a given criteria. ETFs exist for nearly any investment strategy and if someone imagines something new that can have value, an ETF is sure to follow.
ETFs are often similar to index funds, focused mutual funds that track an index.
But, have some key differences from index funds, primarily the way in which they trade, their fees and the way dividends are distributed. ETFs that hold dividend-producing securities distribute their dividends on a quarterly basis. ETFs hold the underlying assets, usually stocks, and investors buy shares of the fund, much like mutual funds — but ETFs are easier to trade because they can be traded through an online broker and don’t require a full-service broker or buying directly from the mutual fund company.