What are stocks, ETFs, and mutual funds?
Learn the differences between these 3 investment types and what to consider when choosing which to invest in.
July 8, 2021
Plynk offers a few different investment types to help you put your money to work. But how do you decide which to invest in?
Let’s start by defining these 3 investment types.
What’s a stock?
A stock represents a piece of ownership in a company. Owning a stock means that you own a “share” of the company.
You can buy and sell stocks throughout the day, and their prices change based on supply and demand.
That means if enough people want to buy a particular stock, its price will rise. If enough people want to sell that stock, its price will fall.
What’s an ETF?
ETF is short for exchange-traded fund. These allow you to invest in a mix of stocks or bonds all at once. Each ETF is like an investment bundle.
ETFs also trade like stocks: You can buy and sell them throughout the day, and their prices change based on supply and demand.
They’re often created to follow a theme or category—like a sector, industry, or region. So when you invest in a single ETF, your money is being spread out across a bunch of investments that fall into that category.
Here’s a quick example: You might decide to invest in technology. Instead of choosing to buy stock in a single technology company, you could instead invest in a technology ETF. By investing in the technology ETF, you’re investing in many technology companies all at once, without having to pick and choose yourself.
What’s a mutual fund?
A mutual fund pools money from many investors to buy a collection of stocks, bonds, and other investments.
Sounds like an ETF, right? Almost, but not quite.
Mutual funds do spread out your investments just like ETFs. And they, too, can be categorized based on what they invest in. (Just like our ETF example above, you could also invest in a technology-themed mutual fund.)
But unlike stocks and ETFs, mutual funds trade once, at the end of the day. So you’ll only see the prices change after the market closes.
So…which one do I choose?
There’s no right or wrong answer. This decision is unique to each person based on their own interests, goals, and comfort with taking risk. You might even decide to invest in all 3 types!
Here are a few things to consider:
Picking a stock
It can be a rewarding and exciting experience to invest in a company you’re passionate about or whose products you use often. And there could be potential to grow your money, especially over the long term.
That being said, stocks are one of the riskier investment types (especially if you invest all your money in just one company). If the company you’re invested in performs poorly, the value of your investment may drop.
That’s why investing in stocks is a more “hands-on” experience, meaning you’ll want to pay attention to news on the company you’re invested in, and what’s going on in the stock market more broadly. That's not to say that you should trade more if you own individual stocks, but it's important to know what you're investing in.
Exploring ETFs and mutual funds
If you don’t want to choose individual stocks or you’d like a more “hands-off” approach, ETFs and mutual funds can be smart options.
They’re both overseen by professional money managers, and they spread your money across different investments.
But most ETFs and mutual funds have yearly fees called “expense ratios,” which are taken out of the money you invest. The fee covers the costs of operating the fund—like the money manager’s time, research costs, legal fees, etc.
It’s important to look for the expense ratio of a mutual fund or ETF before you invest. They typically range from 0.02% to 1.2% or higher. And while 1% may seem like tiny percentage, that money can really add up over time. The higher the expense ratio, the less of your money going to work for you in the stock market.
Still feeling unsure?
Remember this: You can invest in a stock, ETF, or mutual fund for as little as $1 in your Plynk account. That means you don’t have to risk a lot of money to dip your toe in to get a feel for the process.