Today we are going to discuss the differences between ETFs and mutual funds. If you are new to trading and investing in the stock market, one of the things you might not be aware of yet is that you don’t necessarily need to purchase individual stocks to invest in the stock market.
While buying stocks individually is a popular choice amongst many traders, there are also some very good opportunities in two types of investments we will cover today: ETFs and Mutual Funds. It can sometimes be confusing for new investors to understand the differences between ETFs and mutual funds, so we are also going to explain the key differences in each.
Why Would You Want to Invest in an ETF or Mutual Fund?
Buying individual stocks can be somewhat risky, since you are investing in a sole company. One of the ways you can invest with far less risk {though risk is always something to consider} is through buying groups of stocks.
Rather than picking out your own groups of stocks and buying each individually by yourself, there are two popular methods you can choose to purchase groups of stocks without needing to choose them on your own and buy them one by one. The two most popular methods of doing this which we will cover here are Mutual Funds and ETFs.
If you’ve ever heard the term “diversification” this is where these types of investments come in to play. Diversification means you can lower your risk through buying multiple stocks across a broad range of industries.
What this means, is that you will not be dependent on any one sole stock performance, and it helps spread out any losses and gains evenly.
So today, we are going to learn what each of these are, the differences between a ETF versus a mutual fund, as well as eft vs mutual fund performance.
So let’s get started! What is an ETF? What is a Mutual Fund?
An ETF is what is know as an Exchange-Traded-Fund that tracks an index or commodity or bonds. ETFs are most well known for their ability to be traded like a common stock on an exchange.
With an ETF, the price changes throughout the day and they can be bought at anytime during the trading day. Swing trading ETFs is one popular investment strategy traders will use.
When you invest in ETFs, you are responsible for making sure that you choose the right type of diversified fund for you. You would trade it just as you would any other stock in your online stock broker’s software program.
Now, let’s contrast this to a mutual fund. A mutual fund is a group of stocks that is managed by a team of professionals and you are purchasing shares of that company which is made up of the team of professionals. These are not traded like other stocks, so it is important to understand their differences.
The Difference Between ETFs and Mutual Funds: A Side By Side Comparison
In order to understand the differences between mutual funds vs. ETFs, it’s helpful to look at the different characteristics of each side by side.
Here are the key differences that you will notice about ETFs:
- Can be purchased through a brokerage account
- Can be traded on major stock exchanges any time during the day
- Their prices fluctuate and go up and down throughout the day
- Often cost less because they are not managed like a mutual fund
- There are no minimum amount of shares required – you are not forced to purchase certain amounts
Now let’s compare this to a Mutual Fund:
- Must be purchased through a mutual fund company
- They are only priced at the end of the day after the market closes
- They are managed by a team of professionals, which can cause them to be a higher cost
- Mutual Funds often have minimum purchase requirements to invest
Now that we’ve gone over ETFs vs Mutual Funds, you are prepared to decide which one might be the right choice for your investment strategy.
Each have their benefits, and disadvantages. For example, with a mutual fund, you can decide to invest in a mutual fund company which invests in fixed rate bonds and other securities, minimizing your risk. With ETFs, you have a higher likelihood of being able to see greater returns, but you also have a much higher risk for losing your investment.
Remember, you are the best person to decide what financial risks you are willing to take and how to invest strategically. We cannot tell you one is better than the other, nor do we provide any financial advice on this website!
Personally, I myself prefer ETFs over mutual funds. I believe that it gives you much more control, flexibility, and freedom in making your own financial decisions. They also cost less to invest in, making it an attractive and enticing alternative to the mutual fund. However, if you prefer that someone else does all the decision making and you have enough of the upfront investment to put into the mutual fund, it can be a great choice as well.
I hope you find this comparison between mutual funds and ETFs helpful – if you have any questions, or if you’d like to share your thoughts – comments are always welcome below!
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