People ask the most common question when they are first involved in investing: “what is safer, ETFs or stocks?” A person who asks this question may not realize that the answer to this question depends on many factors.
If you look at some of these factors, however, it seems clear that if you choose between ETFs and stocks for safety, there are better options out there.
Securities
Securities are traded on public exchanges, as everybody knows. The explanation for this is that having them traded publicly helps everyone understand the actual market value of a stock or an ETF.
Publicly traded equities have far fewer restrictions than other types of securities, which leads to more accurate pricing. It also leads to more publicly available information that can be used to figure out the value of an ETF based on its underlying securities.
Equity stock
There are many types of stocks, but one of the most common is equity stock, also known as common stock. A significant benefit of equity stock is it comes with voting rights, so you can voice your opinion about decisions made by a company or vote for board members if you have enough equity.
This right alone makes it riskier than an ETF since you will need to research what companies do and how they make money to understand if their business will continue growing over time.
Main downside of equity stock
The main downside with investing in equity stocks compared to ETFs is all this effort means you run the risk of not doing the proper research before buying.
ETFs are traded as common stock
ETFs are traded like a common stock on public exchanges when it comes to ETFs. The difference is with an ETF; you do not own any shares of the company which issues them.
Instead, you own shares of the ETF itself if you buy enough of them. Investing in this way means there is no need to try and figure out what each company does or how healthy its business will be over time.
Diversified portfolio
You can invest in a diversified portfolio that acts like a mutual fund without researching any individual companies inside of it. As long as the primary index you are invested in continues to grow, your investments should continue doing well.
Also, since exchanges are monitored by professionals who know everything about the trading process, it minimizes the risk of fraud compared to investing in stocks directly through a broker.
ETF and equity stock price
Another difference between ETFs and equity stock is that if one company represented in the index goes bankrupt, the price of the ETF could go down dramatically. It’s unlikely to happen as long as enough other companies are doing well in an index.
When you invest your money into an equity stock, however, it can go all the way down to 0 dollars since you own part of a firm that does not exist anymore. If this happens, you will need legal help or advice on how to handle such a situation.
This risk with equity stocks does not occur with ETFs unless the entire primary market they track goes bankrupt and vanishes from existence.
Traded publicly
On the whole, you can see ETFs and stocks are both traded publicly, and at least some information is available about them. But when it comes to safety, ETFs win out. You do not need to research what each company does or how healthy its business will be with an index fund over time.
Therefore, ETFs are safer than equity stock since there is little risk involved compared to actively researching several different companies before buying into one of them as an investment.
Bottom line
With many options out there, it’s easy to find something that fits your needs or wants. When it comes to safety, ETFs are an excellent choice since you do not need to research what each company does or how healthy its business will be over time with an index fund.
Therefore, ETFs are safer than equity stock since there is little risk involved compared to actively researching several different companies before buying into one of them as an investment.