After the 2008 financial crisis, the demand for ETFs had skyrocketed. According to statista.com, in 2018 the value of assets managed by global Exchange Traded Funds is estimated at $4.46 trillion. Because of that, today we will discuss the differences between ETFs and stock trading and hopefully, you will manage to make the right decision for investing your money.
It has to do with risk
If you invest in a stock, you are basically buying a portion of the company. After you’ve bought it, if the company does well, the value of the stock will increase over time, and if it doesn’t you will lose money.
Buying a particular stock means that the risk is very concentrated in specific instruments and the future performance is dependable on the performance of the company. ETFs, like the trade.com ETFs, had increased in popularity because they allow you to buy not just a single stock, but a basket of stocks, meaning you are not dependent on the performance of a single company.
The process is very simple since you can buy and sell ETFs just like any other financial assets, by simply having a brokerage account. We must be clear that does not mean the risk is zero.
Investing in financial instruments carries a certain degree of risk which varies according to different types of asset classes. Since buying an ETF means that you are buying not just a single stock, you are exposed to the future performance of a certain number of stocks.
Some of them might do well and some of them not. The bottom line is that ETFs are very liquid instruments and volatility is small. They are also a tool that enables you to profit from the expansion or contraction of an entire industry or sector.
One negative aspect
Still, nothing is rosy when it comes to ETFs. Since there are more than $4 trillion worth of ETFs out there, we can notice a particular tendency across all industries. When a few leading stocks begin to perform in a certain way, all industry-related stocks perform relatively the same.
That happens because market participants get involved through ETFs, meaning they are buying stocks in many different companies. That could have a negative effect, by artificially inflating the value of a stock which is not doing so well fundamentally, or by accentuating a bearish move, even though a particular stock should perform well.
Overall, ETFs had proven to be more suitable if we relate to risk and the current market size proves that point.
ETFs are financial instruments carrying a high level of risk and may not be suitable for all investors. You should carefully consider before deciding to invest in ETFs. Losses can exceed deposits.