Stocks are traditional investment instruments that have been favored by investors for many years. Exchange-traded funds (ETFs), on the other hand, are relatively new to the investment scene. ETFs take the mutual fund concept a step further by listing individual funds on stock exchanges, affording investors all the benefits of being able to trade on an open exchange in addition to participating in the fund. In general, investing in individual stocks or ETFs is best reserved for experienced investors.
Shares of stock symbolize shares of ownership in a corporation. Investors can hold stocks indefinitely or they can trade them with other investors on established stock exchanges, such as the New York Stock Exchange and Euronext. Stock traders can buy stocks with quickly-rising values and sell them for a fast profit, or they can hold them over a long term to realize larger value appreciation. Stocks also provide a means to gain control over a company, since owning more than 50 percent of a company's stock grants a stockholder unchallengeable voting power.
It should be noted, however, that stock investing by no means conveys a guarantee of profitability. It is always possible to lose money, up to your entire original investment, when playing the stock market.
Mutual Funds and ETFs
Mutual funds are a hands-off option for investors who wish to get involved in the stock market without shouldering the enormous task of studying and mastering stock trading. Mutual funds allow investors to place their money in the hands of experienced stock traders who invest it according to their clients' unique risk tolerances.
Exchange-traded funds are similar to mutual funds in a number of ways: they work essentially identically, except for the fact that they trade alongside stocks on exchanges around the world. ETFs' portfolios are generally linked to popular stock indexes as well. These funds' values rise and fall on the exchanges according to their performance, and they are subject to stricter reporting rules to federal agencies such as the Securities and Exchange Commission.
Mutual Fund Pros and Cons
Mutual funds, from the clients' perspective, operate much the same way as a savings account, except that the potential returns fluctuate according to portfolios' performance. Unlike savings accounts, however, mutual fund contributors risk losing their initial investment if the fund performs poorly over a long term. Speak with a broker about your unique risk tolerance to ensure that your money is invested in a way that is ideal for your financial situation.
ETFs have all of the advantages of mutual funds, with additional bonuses. ETFs offer investors more ways to make money; rather than simply relying on accumulating balances in their individual fund accounts, investors can reap additional profits from the fund's performance by trading shares on open exchanges. ETFs carry lower total expenses than traditional mutual funds or stock investments, and they do not carry minimum investment requirements.
David Ingram has written for multiple publications since 2009, including "The Houston Chronicle" and online at Business.com. As a small-business owner, Ingram regularly confronts modern issues in management, marketing, finance and business law. He has earned a Bachelor of Arts in management from Walsh University.