Should You Buy Stocks or ETF (Exchange Traded Funds)


In your journey with money, you would have probably heard about stocks investing or ETF (exchange traded funds). So what is the difference between stock investing and ETF since there are also stocks in an ETF? Let’s do a distinction between the both of them first.

Stocks Investing Value ETF Singapore

“Wah. What to buy ah? So many things to know”

Definition Distinction

Stock: A fractional ownership of a company

ETF: A basket of stocks, commodities, bonds, etc

In simple language, some ETF are made up of many stocks together.

 

Advantages of Stocks

Warren Buffett says “Concentration is how you get rich, diversification is how you stay rich”.

If you have insights of a particular company or have an excellent knowledge of a particular company. It is better to invest in that particular company than to spread out your returns over an ETF. A good example is the retail sector. A retail sector is seasonal. There are period of time where there will be good sales and not so good sales. If your friends goes to a particular retail shop all the time. Let’s say XXX Bags.

You see that there is a huge crowd in XXX Bags everyday. The company also recently upgraded the stores. There are also new product lines that attracts people of a particular age group. It is also expanding overseas. However, the market has not taken notice yet. Looking into the fundamentals of the company, it is good. With this insights, it will be better to invest in XXX Bags.

 

Advantages of an ETF

Warren Buffett says “Concentration is how you get rich, diversification is how you stay rich”.

The same phrase can be used in a different way. If you are unsure at which sector to enter or have limited knowledge what companies are doing well, it might be better to get an ETF. The reason is very simple. If you can’t beat the market, JOIN THE MARKET.

Diversification is very powerful. Ask yourself, what is the probability of a company becoming bankrupt VS the probability of all 500 companies becoming bankrupt at the same time?

Value Investing Singapore

“S&P500 consists of 500 of USA Biggest companies”

Let’s compare before 2 assets. One is XXX company, the other is a USA ETF consisting of 500 USA companies. What is the probability of a company becoming bankrupt VS the probability of all 500 companies becoming bankrupt at the same time? If you are like me, you probably will agree that the chances of 1 company doing bankrupt is higher.

In an ETF, if the company is not doing well. Recently, GE has not been doing well. It has been dropped out from the index and replaced with another company.

 

Seems like both also got advantage leh. So how?

It really depends on your lifestyle and personality. If you are an expert value investor, you can continue to buy undervalued stocks at a sensible price.

However, if you are someone who works hard in your job and don’t have a lot of time to do research, an ETF might be better for you.

Hope you learn something today.

A publication of Value Investing blog Journeywithmoney. Please also follow us on our Facebook Page.

Wishing you the best in your journey with money.

Bonus: 3 reasons why you should consider ETF.

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