Why Exchange-Traded Funds Are Better than Individual Stocks - dummies

Why Exchange-Traded Funds Are Better than Individual Stocks

Why buy a basket of exchange-traded funds (ETFs) rather than an individual stock? You’ll sleep better knowing that your risk is spread around, rather than based on the performance of a single stock that could take a dramatic dive.

Here’s an example: A fictitious company called ABC Pharmaceutical sees its stock shoot up by 68 percent because the firm just earned an important patent for a new diet pill; a month later, the stock falls by 84 percent because a study in the New England Journal of Medicine found that the new diet pill causes people to hallucinate and think they are Genghis Khan.

Compared to the world of individual stocks, the stock market as a whole maintains a pretty even keel. Stocks, however, can rise and fall fast enough to make your head — and your personal finances — spin.

If you are not especially keen on roller coasters, then you are advised to put your nest egg into not one stock, not two, but many. Unless you have lots of money at your disposal for investing — and taking chances, the only way to effectively diversify is with ETFs or mutual funds.