ETF or single stock?
You can buy individual companies, or hundreds of them with a single security. Both have their place. Here is how they differ.
Two ways into the market
A single stock gives you a small slice of exactly one company, so your result depends on that one business. An ETF works differently. It is a basket holding many stocks at once, and one purchase makes you a part-owner of everything in it. The name stands for exchange traded fund, a fund that trades on the stock exchange. You buy and sell it just like a share.
What an index is
Most ETFs track an index. An index is a list of companies chosen by fixed rules, a bit like a league table. The DAX covers the 40 largest companies on the German stock exchange. The MSCI World holds well over 1,000 large and mid-sized companies from 23 developed countries. An ETF on an index simply buys every company on that list, each in its proper weight. Nobody has to decide which stock looks promising right now, which is why these ETFs are called passive.
Companies inside an ETF that tracks the DAX. A single purchase makes you a part-owner of all of them.
Where ETFs shine
The biggest advantage is the diversification you met in the last chapter. If one company in the index fails, it is only a small part of your money. Running costs are low too, because no team is actively picking stocks. For broad index ETFs they are often well below half a percent a year. And you do not have to follow every company yourself. Still, an ETF is not a savings account. When the whole market falls, your ETF falls with it.
Where single stocks shine
Single stocks have their own appeal. You know exactly which business you own and can follow how it does. If it does unusually well, your share can leave the market far behind. The same is true in reverse. Picking stocks takes time to read annual reports and make sense of the news. It also takes the calm to sit through a big loss on one position. If you only own a handful of stocks, you are poorly diversified, even if it does not feel that way.
An ETF is only as broad as its index. One holding 40 German companies is more spread out than a single stock, but far narrower than one holding well over 1,000 companies from many countries. Always check which index sits underneath.
What ETFs cost
An ETF has running costs, stated as a percentage per year and known as the TER. At 0.2 percent, a 1,000 euro investment costs you about 2 euros a year. You never pay this separately. It is quietly taken out of the fund's assets. On top come your broker's fees for buying and selling. Single stocks have no running fund costs, but you pay order fees for each one. If you buy lots of individual stocks to spread your risk, the total cost often ends up higher.
What suits you
There is no right or wrong here, just different needs. If you are short on time and mainly want broad, long-term exposure, a broad index ETF is an obvious building block for many people. If you enjoy digging into individual businesses, you can add single stocks on top. Plenty of investors combine the two: a large, well-diversified core plus a smaller slice for companies they find especially interesting. With any ETF, look at three things: the index, the annual cost, and whether income is paid out or reinvested.
Distributing or accumulating? A distributing ETF pays dividends into your account. An accumulating one reinvests them automatically. More on this, including tax, in the chapter on taxes.
In short
- A single stock is a stake in one company. An ETF is a basket of many stocks that follows an index.
- ETFs offer diversification and low costs, but they do not protect you when the whole market falls.
- How broad an ETF is depends on its index, such as 40 companies in the DAX or well over 1,000 in the MSCI World.