Definition
Stocks
Stocks represent partial ownership in a company. Stocks allow you to invest in a company by buying a share, which makes you a "shareholder."
ETFs and mutual funds
Exchange-traded funds (ETFs) and mutual funds are baskets of investments, which can include things like stocks or bonds. Both are overseen by fund managers, who select and monitor the investments within the funds.
How they work
Stocks
As a shareholder, you share in a company's profits and losses. The value of your share may rise and fall based on supply and demand, which may be influenced by company performance, industry news, global events, market conditions, and investor sentiment.
ETFs and mutual funds
ETFs and mutual funds may be "actively" or "passively" managed. The goal of an actively managed fund is to maximize returns with a specific investment objective. A passively managed fund is designed to mimic the performance of an index (like the S&P 500).
Risk and diversification
Stocks
Like all investments, stocks carry some risk. There's no guarantee you'll make money by investing in them, and they can lose value quickly. Investing all your money in just one stock can be risky because you could lose all of it at once.
ETFs and mutual funds
There's also no guarantee you'll make money by investing in ETFs or mutual funds. But funds can be more diversified than individual stocks, meaning they spread your risk across multiple underlying investments. So when one of those underlying investments loses value, another may gain value.
Buying and selling
Stocks and ETFs
Most stocks and ETFs are both traded "on an exchange" which means you can trade them when the stock market is open. Their prices fluctuate, so 2 investors may get different prices for shares of the same company, depending on the time of day they buy or sell them.
Mutual funds
Unlike stocks and ETFs, mutual funds are traded once per day after the stock market closes. Investors who buy shares of the same fund on the same day get the same price, no matter what time they place their order during the day.
Cost and fees
Stocks
At many major trading firms, you can buy stocks without paying a commission (or a trading fee). All you pay is the price of the share.
ETFs and mutual funds
Funds may have more fees associated with them, depending on the type you invest in and which trading firm you use. Be on the lookout for transaction fees, loads, commissions, and expense ratios.
It is especially important to understand expense ratios, which are yearly fees that apply to many ETFs and mutual funds. This fee covers the cost of operating the fund and is shown as a percentage. Most passively managed funds tend to have lower expense ratios than actively managed funds.
Earning money on your investments
Capital gains
You can make money by selling your share of a stock, ETF, or mutual fund for more than you bought it. You get to keep the money you've made, called "capital gains," minus some taxes.
Dividends
Some stocks, ETFs, and mutual funds may pay out "dividends," which are regular payments made to investors. These are usually paid out quarterly. You may also have to pay taxes on the dividends you earn.
The bottom line
Stocks, ETFs, and mutual funds are 3 separate investment types, but they do share some similarities. Depending on what you're looking for, one may be a better fit for you than another. That being said, many investors own all 3.
You might consider investing in stocks if: you want to invest in a specific company, avoid paying expense ratios, buy and sell shares throughout the day, and you don't mind taking on more risk.
You might consider investing in ETFs if: you want to diversify your investments, buy and sell shares throughout the day, and you don't mind paying a fee for active or passive fund management.
You might consider investing in mutual funds if: you want to diversify your investments and you don't mind paying a fee for active or passive fund management.
