Investing in ETFs versus individual stocks: what's the difference?

The rundown

Buying individual shares gives you direct ownership of a single company, which can offer significant growth but comes with higher risk and less diversification.
ETFs allow investors to invest in a range of companies through a single fund, providing greater diversification and generally lower risk.
Your choice should depend on your risk tolerance, investment interests, and financial goals.

When you start investing, one of the first decisions you’ll face is whether to buy individual shares or invest through Exchange Traded Funds (ETFs). Both give you access to the share market, but they work in different ways and suit different types of investors.

What are individual shares?

Buying an individual share means owning a small piece of a single company listed on the stock exchange. This means an investor:

Has direct ownership in one company
Has the potential to receive dividends and capital growth
May have a higher risk of loss if the company underperforms

When you invest in a single company, you’re relying on the performance of that one business. If it does well, your investment may grow. If it struggles, your investment may fall in value.

What are ETFs?

An ETF is an investment fund that holds a collection of shares across different industries and sectors and trades on the stock exchange like a regular share. Investing in ETFs provides investors with:

Diversification across a range of companies or sectors
Lower costs than buying multiple individual shares
The ability to passively or actively manage their investments

ETFs are designed to track the performance of a market index or theme, helping spread your risk across multiple investments.

Let's compare the two investment types:

	Investing in individual shares	Investing in ETFs
Diversification	Low diversification Investing in one company	High diversification Investing in a bundle of companies
Risk	High risk Growth is dependent on one company’s performance	Lower risk Risk is spread across sectors
Management	Self-directed	Fund-managed

When investing in the sharemarket, always consider:

Your time and interest: Do you enjoy researching companies and tracking performance?
Your risk tolerance: Are you comfortable with the ups and downs of individual stocks?
Your investment goals: Are you aiming for long-term growth, income, or diversification?

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