The differences of Stocks, Mutual Funds, and ETF

When you buy stocks, you become part owners of a company. A stock represents the investors claim, your claim, on the company's assets and earnings. This means that as you increase your stock holdings on a company, your ownership to the company becomes greater. Regardless, however, on the amount of stock holdings you have on a company, you, as an investor of that company, are technically part owner of every asset the company has and have a share on every profit it makes as well as being entitled to any voting rights that comes with the stock. These are the basic characteristics of a stock.

On the other hand, ETF or Exchange Traded Funds are similar to stocks in such a ways that they are both traded in the market. ETFs, however, are investments on securities of companies in an index. Moreover, ETFs are not sold directly as individual shares to investors. ETFs instead are grouped into large chunks of shares known as "Creation Units." ETFs are sold in the same market exchange as stocks. You can do similar stock trading techniques like stop loss, limit orders and short sales on an ETF. ETF's prices are also affected by market fluctuations, just like regular stocks.

Generally speaking, ETFs are kinds of mutual funds. But traditional mutual funds differ to ETFs in such that mutual funds sales are conducted at the end of the market day unlike ETF which are traded during the market hours. This means, ETFs are the same mercy of market forces as stocks are during the trading day. With would also need less to own an ETF compared to owning ordinary mutual funds. ETFs are also said to be more tax efficient and have greater flexibility than mutual funds. You pay low annual expenses for ETFs. Still, investors of ETFs need the assistance of brokers to buy and sell ETFs in the market. This of course means that investors need to pay brokers a commission fee, which could sometimes amount to a large sum. You don't need a broker when you invest on mutual funds. Mutual funds are also said to be more appropriate for long term investments.