Investing in ETFs - the Key Definition as Baskets of Food

I have been asked the difference between stocks and ETFs. I came up with a short analogy on that.

Imagine you went to a supermarket. There are products, and you want to buy them. You can go to each one of them, check them separately, add them to your cart and then have a checkout. Think of those individual products as stocks. You can buy stocks from your bank’s app as well as the platforms of international brokerage firms. When you buy those stocks, you buy a piece of the company. You invest in the company, and the company has the right to use your capital for building and continuing its operations.

Now imagine you went to a supermarket, and the managers of the supermarket had already prepared “baskets” for their customers. You can still go and buy products individually, but now you can also just buy one basket and you will be ready to go. In addition to that, the supermarket prepared different types of baskets for its customers. For chocolate lovers, there is a chocolate basket in which there are chocolate products. For cheese lovers, there is a cheese basket with different mouth-watering cheese types around the world. For meat lovers, there is a basket of ham, sausage and bacon. 

Just like buying products individually, you can directly go the section of baskets, pick the basket depending on your taste and interest, and easily buy it. By buying the basket, you instantly buy all the products inside of the basket. This basket is the ETF. The products in the basket are still individual stocks. When you buy an ETF, you instantly buy a diversified structure of stocks.

ETFs are Exchange-Traded Funds. Literally, they are funds that you can buy as if you are buying an individual stock. It is simple, and when you buy, you instantly have a diversified portfolio which contains different individual stocks.

That’s it. Now you know the difference between individual stocks and ETFs.