Stocks vs ETFs vs Mutual Funds
Most investors own the stock market in one of three ways: by buying individual company shares, by buying exchange-traded funds (ETFs), or by buying mutual funds. All three can belong in a sensible portfolio. They differ in how much diversification you get, how they trade, what they cost and how they are taxed.
Individual stocks
Buying a stock gives you direct ownership of one company. You choose exactly what you own and pay no ongoing fund fees. The trade-off is concentration: the fortunes of a single company can change quickly, and even well-known businesses can lose most of their value. Building a diversified portfolio from individual stocks takes many holdings, research and ongoing attention.
Mutual funds
A mutual fund pools money from many investors and buys a portfolio of stocks, bonds or other assets. Each share represents a slice of that whole portfolio.
- Pricing: mutual fund shares are bought and sold at the fund's net asset value (NAV), which is calculated once per business day after the market closes. An order placed during the day gets that day's closing NAV.
- Costs: every fund charges an annual expense ratio. Some also charge sales loads when you buy or sell, or ongoing 12b-1 marketing fees. Many no-load funds charge neither.
- Minimums: some funds require a minimum first investment, though many brokers waive or lower it.
- Management: funds can be actively managed, with a team picking investments, or passively managed to track an index.
Exchange-traded funds
An ETF also holds a basket of investments, but its shares trade on an exchange like a stock. Prices change throughout the trading day, and you can use limit orders and other order types. Many ETFs track an index, while others follow active strategies.
- Costs: ETFs charge an expense ratio. Online trades of ETFs are commission free at most large brokers, though you still pay the bid-ask spread.
- Tax efficiency: because of the way ETF shares are created and redeemed, many ETFs distribute fewer capital gains than comparable mutual funds. That matters most in a taxable account.
- Price versus value: an ETF's market price usually stays close to the value of its holdings, but it can drift above or below, especially for thinly traded funds or in volatile markets.
Side-by-side comparison
| Individual stock | ETF | Mutual fund | |
|---|---|---|---|
| Diversification | One company | Many holdings | Many holdings |
| When it trades | All day | All day | Once a day at NAV |
| Ongoing fees | None | Expense ratio | Expense ratio, sometimes loads |
| Typical use | Targeted ownership | Core or targeted holdings | Core holdings, retirement plans |
Which one fits?
For most people building long-term savings, a small number of low-cost, broadly diversified funds does the heavy lifting. Whether you use ETFs or mutual funds often comes down to what your account offers: workplace retirement plans usually offer mutual funds, while brokerage accounts offer both. Individual stocks can be a smaller, deliberate part of a portfolio for investors who enjoy the research and accept the extra risk.
Before buying any fund, read its prospectus or summary prospectus for the investment objective, holdings, risks and full fee table. Even small differences in expense ratios add up over decades.