Here is your streamlined guide on the three types of investment vehicles available: stocks, ETFs, and mutual funds. There are pros and cons to each type of investment vehicle and in this blog post, we will outline the definition of each and when to consider utilizing them, and their pros and cons. With any investment portfolio, it is important to diversify and include various types of investment vehicles.
Stocks – Investment
Stocks are a share of ownership in a company thus when you purchase a share, you become a partial owner of the company, a shareholder.
Pros
- Allow you to grow with the economy as they fluctuate with the business cycle, increasing and decreasing in value but allowing the shareholder to benefit from the corporate value created
- Typically have higher returns compared to other vehicles over time
- Easy to buy and sell
- They may also provide dividends (a monthly or quarterly return based on the number of shares you own)
Cons
- Volatile as they fluctuate with the market
- Ownership of one single company increases the risk associated with the investment as if the company does not do well, you could lose all your money
- Purchasing a single stock of a well-known company could be a large investment commitment (i.e. > $1,000 per individual stock)
ETFs Investment
ETFs, Exchange Traded Funds are a collection of stocks, bonds, index funds, currencies, and/or commodities. A simple way of thinking about ETFs is a basket of different assets one can purchase, grouped together for you to invest in. Thus, by buying that one basket you get a group of assets which might not be accessible financially by buying separately. ETFs also are passively managed and thus have a management expense fee.
Pros
- Allows you to buy assets at a lower price than if individually bought
- Diversifies the investments with the one basket
- High liquidity
- Lower MER than mutual funds
Cons
- Commissions and trading fees
- Still have to pay an MER
Mutual Funds Investment
ETFs stemmed from mutual funds and thus are similar in nature. Mutual funds use a pool of money collected from many investors to invest in securities such as stocks, bonds, and other assets. The main difference is that mutual funds are professionally managed and these money managers attempt to produce income/capital gains for the investors.
Pros
- Actively managed by professionals
- Allows you to pool your money with other investors for certain investments
- Many different types of mutual funds for different risk appetites
Cons
- Higher MER fees
- No real time tracking like stocks and ETFs of the rate – usually a day lag in prices/value
- Difficulty in comparing the mutual funds and the managers’ expertise
Think of the difference between mutual funds and ETFs with the following two analogies:
- If you were pooling money to buy a cake for a coworker and hiring an expert baker to guide you, that is similar to a mutual fund where you place your money in a collective whole, managed by a fund manager, to achieve a greater gain. The expert baker guides you to making the best cake!
- If you were buying ingredients of a cake and found a cake kit that included everything you need in fractional amounts in one basket, that is similar to an ETF where you would buy a collection of assets in fractional proportions which would be less than if you bought individual items in whole. However, ETFs are a more hands-off approach where parameters are set but not guided for the duration of the investment.
Hope the article helps you break down the right investment vehicle for your financial needs!
Remember, investing in a variety of different investment vehicles might also be the perfect strategy for diversifying your portfolio. Invest wisely!
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