Stocks vs ETFs: Differences between stocks and ETFs

Stocks and ETFs pursue the same goal: building wealth through investments. Although both investment types aim to grow the money invested, they do so in different ways. While you can invest directly in individual companies with stocks and benefit from their growth, ETFs offer a broad spread across numerous companies or entire markets, thereby reducing the risk of investing.

We take a detailed look below at the differences between stocks and ETFs, their respective advantages and disadvantages and how you can combine them to develop a balanced investment strategy.

• ETFs: ETFs (exchange traded funds) are funds traded on the stock market that bundle a broad selection of securities such as stocks or bonds to offer investors a cost‑effective way of achieving diversification.

• Stocks: Stocks are shares in a company that allow investors to participate in the company’s economic success and benefit from its increase in value as well as dividend payouts.

• Advantages and risks: Stocks have the potential for high returns but carry higher risk due to reliance on individual companies’ success, whereas ETFs offer broader diversification and thus lower risk.

• Combination: The combination of stocks and ETFs lets you use the opportunities of both investment forms and diversify your portfolio.

Definition: What are stocks and ETFs?

Stocks and ETFs provide attractive opportunities to invest in the financial market and benefit from its performance. Yet although they share the same goal of building wealth, they differ in their structure and how they work.

Stocks:

• Stocks are shares in a company that make you a part‑owner.

• When you buy a stock, you acquire a small part of the company and benefit as a shareholder from its potential success.

• Shareholders can usually receive profit distributions (dividends) from the company and benefit from a possible increase in the stock’s value.

• As a shareholder you have a right to vote on corporate decisions and a right to information that allows you to demand details about the business development and the company’s condition.

• The value of stocks depends on the company’s performance, market conditions as well as economic crises and political events that can lead to fluctuations in company profits and share prices, increasing the risk for investors.

ETFs:

• ETFs (Exchange Traded Funds) are publicly traded index funds that bundle a broad selection of securities such as stocks or bonds.

• Unlike individual stocks, ETFs enable investment in a variety of companies or markets, spreading the investment risk.

• ETFs can passively track the performance of an index such as the DAX, S&P 500 or MSCI World, but also follow the performance of sectors, regions or other asset classes.

• Like stocks, ETFs are subject to market fluctuations and a weak market trend or economic crises can affect the value of the entire fund.

• Because ETFs are usually passively managed, their management fees are lower than those of actively managed investment funds.

To better understand the two investment forms, you can check our guides "What are ETFs?" and "What are Stocks?". They give you a clear introduction to the basics and explain how ETFs and stocks work. If you’re looking for an overview before investing, you’ll find everything you need here to choose the strategy that fits you best.

If you want to delve deeper into the investment forms stocks and ETFs, you can read our detailed guides “Investing in stocks” and “Investing in the ETFs”. There we go into the respective investment strategies in detail and show you, among other things, how to pick stocks and ETFs that best match your goals and risk profile.

Advantages and disadvantages of stocks and ETFs

Before you decide on an investment form, it is important to know the advantages and disadvantages of stocks and ETFs. Both offer different opportunities and risks and depending on your personal goals, risk profile and the effort you want to invest, one or the other strategy may suit you better.

Advantages of Stocks:

• Higher return potential: With stocks you have the possibility to beat the market and benefit from the value increase of individual companies.

• Influence on corporate decisions: As a shareholder you have voting rights at the general meeting and may participate in major decisions such as the election of the board.

• Full control: You can decide yourself which companies you want to invest in and thus have control over your portfolio.

Advantages of ETFs:

• Reduced risk: Through broad diversification across many companies and markets the risk is significantly lowered.

• Lower costs: Compared with actively managed funds and stocks, ETFs have lower management fees, making them a cost‑effective investment option.

• Easier entry: ETFs are especially suitable for beginners and offer a straightforward way to invest in the market without much time investment.

Disadvantages of Stocks:

• Higher risk: By focusing on individual companies the risk increases, especially under volatile market conditions, up to possible total losses.

• High time commitment: Stocks demand regular analysis and research to make informed decisions and adjust the portfolio.

• Higher costs with an active strategy: Frequent buying and selling may incur disproportionately many transaction fees, increasing the overall cost of investing.

Disadvantages of ETFs:

• Limited return: ETFs track the performance of an index or sector, which means there is little chance to outperform the market or benefit disproportionately from profits of single companies.

• No influence on corporate decisions: Unlike stocks, ETFs do not grant voting rights, because you are not investing directly in single companies.

• Less flexibility: Unlike individual stocks you cannot make targeted short‑term decisions to profit from market changes or successful companies, since you cannot actively choose the composition of the ETF.

Stocks offer the potential for higher returns, but under higher risk as performance depends directly on individual companies’ success. ETFs, on the other hand, provide a more stable and less risky growth option, but are less flexible because you have no direct control over the selection of companies.

Now that you know the pros and cons of stocks and ETFs, you might be wondering how to invest regularly without much effort. The Bitpanda savings plan is a smart way to do just that. You can set up automated investments in ETFs, stocks, precious metals, commodities and cryptocurrencies – all at regular intervals. This approach lets you benefit from market trends without needing to trade each time. Start with as little as € 1* and make use of the cost‑average effect.

Combining stocks and ETFs and investing for the long term

Stocks or ETFs: why choose when you can use both? Many investors rely on a combination of the two investment forms to achieve stability and growth while balancing risk. A proven investment method here is the Core‑Satellite strategy.

The core of your portfolio should consist mainly of ETFs, which provide diversification and stable returns. You invest in different sectors and companies, which reduces risk and ensures long‑term stability. The core should make up about eighty to ninety per cent of your portfolio.

Stocks serve as satellites in the portfolio, allowing you to invest selectively in growth companies or sectors that you find particularly appealing or expect high returns from. They offer the potential for higher returns but also carry higher risk.

To benefit from the Core‑Satellite strategy, it is important to plan for a long‑term investment horizon. This way you can balance short‑term market fluctuations and fully utilise the advantages of diversification.

What is better: ETFs or stocks?

There is no universal answer to the question of whether ETFs or stocks are the better form of investment. The choice depends on your goals, risk profile and investment style.

ETFs offer a safe and broad diversification of your portfolio, making them especially suitable for beginners or long‑term investors who seek stable growth and want to minimise risk. Stocks, however, offer higher return potential as you can invest selectively in companies you believe have strong growth prospects. However ,the opportunities also come with higher risk. Combining ETFs and stocks is often the key to benefiting from both investment forms.

If you want to use your newly gained orientation on stocks and ETFs, you will find a wide selection of investments on Bitpanda that allow you to get started right away:

• With Stocks you can invest in individual stocks, conveniently and flexibly.

• With ETFs you gain access to a variety of ETFs with which you can secure diversification.

This way you can directly implement your individual investment strategy on Bitpanda, completely tailored to your goals.

Frequently asked questions on differences between stocks and ETFs

We answer the most common questions about the differences between stocks and ETFs.

What is the difference between stocks and ETFs?

The differences between stocks and ETFs lie primarily in the type of investment and diversification.

Stocks are shares in a single company. If you buy a stock, you become co‑owner of the company and benefit from its success, either through value increase or dividends. The value of the stock depends directly on the company’s performance, which may lead to higher returns but also to larger fluctuations.

ETFs however are funds that bundle a variety of securities to mirror the performance of a market or index. ETFs offer broad diversification, as they invest in many companies or sectors, which reduces risk compared with individual stocks. However they generally deliver moderate returns that correlate with overall market performance.

Are stocks or ETFs more suitable for beginners?

For beginners, ETFs are generally more suitable than stocks because they offer broad diversification, lower risk, lower costs and easier handling. Stocks require more research, a stronger focus on individual companies and can be riskier — especially if you have little experience analysing companies and markets.

Why ETFs are good for beginners:

• Risk spreading: ETFs invest in many companies at once and the spread ensures that losses in one company may be offset by gains in others — ideal for beginners who want to minimise risk.

• Lower costs: Passive, exchange‑traded index funds are usually cheaper than actively managed funds or buying many individual stocks, allowing beginners to start with small investments.

• Simplicity: With ETFs you can invest broadly in the market without having to analyse each stock individually or spend much time on research.

• Using a savings plan: If you invest in an ETF savings plan, you can benefit from market trends through regular contributions without constantly managing individual stocks.

Why individual stocks are less suitable for beginners:

• Higher risk: Success with individual stocks depends heavily on the respective company, and as a beginner it is difficult to assess future prospects correctly.

• High time investment: Choosing the right individual stocks requires in‑depth research and continuous market monitoring, because you need to understand company reports, follow market trends and regularly make decisions — which may be time consuming and demanding.

• Complexity: You need to understand how companies work, what factors influence their success and how to pick the best stocks — which can be challenging for beginners.

Can I invest in both stocks and ETFs?

Yes, you can invest in both stocks and ETFs to diversify your portfolio and spread risk. A combination of both investment forms allows you to benefit from the broad diversification of ETFs and the potentially higher returns of individual stocks. For example, you could use a global ETF as the core of your portfolio and complement it with carefully chosen stocks as satellites. You can adjust the ratio of stocks and ETFs according to your personal risk tolerance.

Are ETFs safer than stocks?

ETFs are generally considered safer than stocks because they spread the risk over many companies and sectors. Whereas the success of a single stock depends on the particular company, ETFs offer some stability as fluctuations in individual companies can be balanced out by the performance of the entire market or index. However ETFs are not risk‑free either, as they are still subject to market fluctuations, which can lead to losses.

Further topics about investments

Would you like to go even deeper into investing in stocks and ETFs? In the Bitpanda Academy you will find many more guides that help you refine your investment strategy. Here are some useful articles that provide valuable information:

• What are the risks when investing?

• Stocks vs. derivatives

• What are assets?

• Investing in securities: Full guide