When you invest, your capital is at risk.

by Megan Stals

ETFs vs Stocks: Which investment is right for you?

With so many instruments available, it can be hard to know which one is right for you. This guide is for you to learn all about stocks and ETFs and discover which one suits your investing style best.

What are stocks?

Stocks, also known as shares or equities, represent ownership in a publicly traded company. When you buy stocks, you become a shareholder, which means you own a portion of the company. The value of stocks can fluctuate based on the company's performance and overall market conditions.

Investors buy stocks with the hope that their value will increase over time, allowing them to sell at a profit. Stocks also provide the opportunity for shareholders to receive dividends, which are a share of the company's profits distributed to its owners. However, investing in stocks involves risks as the value can also decrease, potentially leading to losses. It's essential to research and understand the companies before investing in their stocks.

🎓 Learn more: What is stock trading?

What are ETFs?

ETFs, or exchange-traded funds, are investment funds that are traded on stock exchanges, similar to individual stocks. They are designed to track the performance of a specific index, sector, commodity, or asset class. ETFs offer investors a diversified portfolio of assets within a single investment, providing exposure to various markets or industries. They can include stocks, bonds, or other assets, and their value fluctuates throughout the trading day as investors buy and sell shares.

ETFs are favoured for their liquidity, low expense ratios, and flexibility, allowing investors to buy or sell at any time during market hours. They offer a convenient and cost-effective way for individuals to diversify their portfolio and invest in a wide range of assets.

What is the difference between ETFs and stocks?

Stocks represent partial ownership in a single company, reflecting its profit and loss. In contrast, ETFs are pooled investments comprising various assets like stocks, commodities or indexes. A single exchange-traded fund may include numerous stocks or bonds, providing diversified exposure across multiple securities.



Investment funds track an index or asset class.

Ownership in a specific company.

Provides exposure to multiple assets within one fund.

Represents ownership in a single company.

Traded on stock exchanges like individual stocks.

Traded on stock exchanges as individual securities.

Aims to match the performance of an index or sector.

Potential for capital appreciation, dividends, and ownership rights.

Offers diversification, potentially lower risk.

Risk and returns tied to the performance of the company.

Generally high liquidity due to continuous trading.

Liquidity varies based on company popularity.

Typically has lower expense ratios compared to mutual funds.

No associated expense ratios.

May distribute dividends from the underlying assets.

May pay dividends based on company profits.

Simplified investment in a broad market or sector.

Requires research on individual companies.

Passive management (index-tracking) or active strategies.

Active management by company executives.

Typically lower minimum investment requirements.

Varies based on individual stock prices.

Generally tax-efficient due to the creation/redemption process.

Tax implications depend on trading and ownership.

Should I invest in exchange-traded funds, stocks or both?

The decision to invest in an exchange-traded fund (ETF), stocks, or both depends on various factors, including your financial goals, risk tolerance, investment horizon, and market knowledge. Each asset type has its advantages, and diversification across both stocks and ETFs can be a well-rounded approach for your investment portfolio. Here are some considerations for different types of investors:

Conservative Investors

ETFs: For conservative investors seeking stable, long-term growth with lower risk, ETFs are a good option. Choose broad-market index funds that provide exposure to a diverse range of assets like S&P 500 or ASX 200 ETFs or Total Market ETFs.

Stocks: Conservative investors may opt for well-established, dividend-paying blue-chip stocks. These companies tend to be more stable and have a history of consistent performance.

Moderate Investors

ETFs: Moderate investors can consider a mix of index ETFs and sector-specific ETFs. This diversification can offer steady growth potential while minimising the risk.

Stocks: Select a combination of growth-oriented stocks and stable dividend-paying stocks. Diversify across different industries to reduce company-specific risk.

Aggressive Investors

ETFs: Aggressive investors can still allocate a portion of their portfolio to index ETFs for diversification, but they might also consider leveraged or inverse ETFs for short-term speculation or hedging strategies. One could also opt for actively managed funds. Note that these ETFs carry higher risk.

Stocks: Aggressive investors may focus more on growth stocks, including small-cap and high-growth companies. These stocks can have higher potential returns but come with increased volatility.

Long-Term Investors

ETFs: Long-term investors can use ETFs as a core part of their portfolio for consistent growth over time. Regularly investing in broad-market index ETFs allows for easy diversification and compounding returns.

Stocks: Adding long-term growth stocks with strong fundamentals can complement an ETF-focused strategy for potentially higher returns.

Active Traders

ETFs: Active traders might utilise leveraged ETFs, sector-specific ETFs, or inverse ETFs for short-term trading strategies or to hedge against market movements.

Stocks: Active traders may focus on individual stocks, using fundamental and technical analysis to identify short-term trading opportunities.

Overall, a diversified approach across both ETFs and stocks can help balance risk, potential returns and help most investors achieve a truly diverse investment portfolio. ETFs offer easy diversification and broad-market exposure, while individual stocks allow for more targeted investments and the potential for higher gains. It's essential to conduct thorough research, understand your risk tolerance, and consider your investment time horizon before making any decisions.

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What are the pros and cons of ETFs?


  • Diversification: ETFs typically hold a basket of assets (e.g., stocks, bonds, commodities), providing instant diversification within a single investment. This can help spread risk across different sectors or markets.
  • Liquidity: ETFs trade on major stock exchanges like the ASX or Nasdaq throughout the trading day, making them highly liquid. Investors can buy or sell shares at market prices during trading hours.
  • Cost-effective: ETFs generally have lower expense ratios compared to mutual funds. Their passive management style (for index-tracking ETFs) leads to reduced management fees.
  • Transparency: ETFs disclose their holdings regularly, allowing investors to know precisely what assets they own. This transparency enables informed investment decisions.
  • Flexibility: Investors can employ various trading strategies with ETFs, such as short selling, options trading, and limit orders, offering more flexibility in execution.
  • Tax efficiency: The creation and redemption process of ETFs can lead to lower capital gains distributions, enhancing their tax efficiency compared to mutual funds.
  • Access to specific markets: ETFs cover a wide range of asset classes and sectors, giving investors exposure to markets that might be difficult to access individually.


  • Intraday pricing: Frequent trading of ETFs may lead to buying or selling at prices different from the net asset value (NAV), resulting in potential premiums or discounts.
  • Tracking error: Like any investment fund, some ETFs may not perfectly replicate their underlying index's performance, leading to a tracking error that can impact returns.
  • Market volatility: Although ETFs provide diversification, they are not immune to market volatility. During extreme market conditions, ETF prices can be subject to fluctuations.
  • Complexity: Some specialised ETFs may have complex structures or strategies, making them challenging to understand for average investors.
  • Lack of control over holdings: Investing in an index fund means you cannot control the specific assets held within it, which may not align with individual preferences or values.
  • Potential illiquidity: While most ETFs are liquid, some niche or less-traded ETFs may have lower trading volumes, leading to potential difficulties in executing large trades.

What are the pros and cons of stocks?


  • Potential for high returns: Stocks have historically provided higher returns compared to other asset classes over the long term, making them attractive for growth-oriented investors.
  • Dividends: Many established companies pay dividends to shareholders, providing a steady income stream for investors, especially those looking for regular cash flow.
  • Ownership and voting rights: When you buy individual stocks, you become a partial owner of the company and gain voting rights in shareholder meetings, giving you a say in corporate decisions.
  • Diversification options: Investors can build diversified portfolios by investing in stocks from various sectors, industries, and countries to spread risk and reduce the impact of individual company performance.
  • Transparency: Companies are required to disclose financial information and operating performance, allowing investors to make informed decisions based on publicly available data.
  • Flexibility: Investors can implement different strategies with stocks, such as buy and hold, value investing, growth investing, or trading based on technical analysis.
  • Liquidity: Stocks of well-established companies usually have high liquidity, meaning you can easily buy or sell shares without significantly impacting their prices.


  • Volatility and risk: Stock prices can be highly volatile, subject to market fluctuations, economic conditions, and company-specific factors, leading to potential short-term losses.
  • Individual company risk: Owning individual stocks exposes investors to the risk of company-specific issues, such as poor management decisions, lawsuits, or declining market share.
  • Time and research: Successful stock investing requires significant time and research to identify promising companies and understand their financial health and growth potential.
  • Emotional decision-making: Stock market fluctuations may lead to emotional decision-making, causing investors to buy or sell based on fear or excitement rather than sound analysis.
  • Market complexity: The stock market can be complex and challenging to navigate, especially for new investors, with various factors influencing stock prices.
  • Lack of diversification: Investing in a few individual stocks may lead to concentration risk, where adverse events in one or a few companies could significantly impact the overall portfolio.
  • Dividend variability: While dividends can be an attractive feature, they are not guaranteed and may fluctuate or be suspended based on the company's financial performance.

💡Related: How to compare stocks before adding them to your portfolio

How to start investing in stocks and ETFs?

1. Find a stock investing platform

To buy U.S. securities, you'll need to sign up to an investing platform with access to American stock exchanges. There are a number of share trading platforms, of which Stake is one.

2. Fund your account

Complete an application with your personal and financial details. Fund your account with a bank transfer, debit card or even Apple/Google Pay.

3. Search for the desired stock or ETF

Find the security by name or ticker symbol. Do your own research to ensure it is the right investment product for your own circumstances.

4. Choose an order type and buy shares

Buy on any trading day with a market order or use a limit order to delay your purchase of shares until it reaches your desired stock price. Look into dollar cost averaging to spread out your risk, which smooths out buying at consistent intervals.

5. Monitor your investment

Optimise your portfolio by tracking how your stock and the business perform with an eye on the long term. You may be eligible for dividends and shareholder voting rights that affect your stock.

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ETFs vs stocks FAQs

ETFs can be a good option for beginners due to their simplicity and diversification benefits. They provide exposure to a range of assets, making it easier for beginners to start investing with less risk and research compared to picking individual stocks. However, beginners should still conduct research and choose ETFs aligned with their goals.

There is no one-size-fits-all answer. Stocks and ETFs each have their advantages and disadvantages. Stocks offer the potential for higher returns but there is more risk and more research required. ETFs provide diversification and lower costs. The choice depends on your goals, risk tolerance, and investment knowledge. Many investors use a mix of both for a balanced approach.

There are a variety of ETFs to explore, here are just a few:

  • Equity ETFs for stock exposure
  • Bond ETFs for fixed income
  • Commodity ETFs for tracking commodities
  • Sector ETFs for specific industries
  • International ETFs for foreign market exposure
  • Inverse ETFs for profiting from market declines
  • Leveraged ETFs for amplified returns
  • Currency ETFs for tracking foreign currencies
  • REIT ETFs for real estate investment
  • Dividend ETFs for high-dividend-yield stocks
  • Growth and value ETFs
  • ESG ETFs for sustainable investing

Each type offers different risk-return profiles to suit investors' preferences and goals.

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.

Portrait photo of Megan Stals, Market Analyst at Stake.

Megan Stals

Market Analyst

Megan is a markets analyst at Stake, with 7 years of experience in the world of investing and a Master’s degree in Business and Economics from The University of Sydney Business School. Megan has extensive knowledge of the UK markets, working as an analyst at ARCH Emerging Markets - a UK investment advisory platform focused on private equity. Previously she also worked as an analyst at Australian robo advisor Stockspot, where she researched ASX listed equities and helped construct the company's portfolios.


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