A stock is a share of one company. An ETF (exchange-traded fund) is a basket of many holdings you can buy in a single trade — instant diversification, traded like a stock.
Why most people start with ETFs
- Diversification — one broad-market ETF can hold hundreds or thousands of companies, so no single failure sinks you.
- Low cost — index ETFs charge tiny annual fees, quoted as an expense ratio.
- Simplicity — you capture the market’s long-term growth without picking winners.
Reading an expense ratio
The expense ratio is the percent of your money the fund charges per year.
A 0.03% ratio on $10,000 is $3 per year. A 1.0% ratio is $100 — and over decades that gap compounds into real money. Favor low-cost, broad index funds for the core of a portfolio.
Index funds vs. active funds
| Index fund | Active fund | |
|---|---|---|
| Goal | Match an index | Beat an index |
| Cost | Very low | Higher |
| Track record | Hard to beat over time | Most underperform after fees |
When individual stocks make sense
Owning single stocks means higher potential reward — and higher risk. It is reasonable after you have a diversified core, and only with money you can afford to watch swing.
A portfolio of five stocks you love is not diversified. Concentration can win big and lose big; size those positions deliberately, not by enthusiasm.
The long-term mindset
Time in the market generally beats timing the market. Automate contributions, reinvest dividends, and let compounding work. Next: how to mix it all in Asset Allocation.