The Beginner's Guide to Stocks, Index Funds, and ETFs

You’re new to investing. You’ve heard the term “stocks,” but the idea of splitting up a company and selling “pieces” still feels odd.

A company is a company—why would anyone starting a business want to split up the ownership? Unless you own a company yourself, let’s set that aside for now. Instead, let’s focus on what owning these investments can do for you. Not just one stock—but many, over time. That’s where diversification comes in: spreading your money across different companies and industries so one bad investment doesn’t sink your whole plan.

Index Funds

Risk level: Low (but not risk-free)

Potential returns: Steady, long-term growth

An index fund is a big basket of stocks that tracks a specific market index—like the S&P 500. It rises and falls with the overall market, which means:

• Less volatility than individual stocks.
• Often lower fees.
• Long-term performance that often matches the overall market.

If you’re looking for a “set it and forget it” investment, index funds are a solid foundation.

The lower fees are the key: you want the lowest fees as you can possibly get because those fees compound, too. Even a 1% fee compared to a .1% fee can make a world of difference. There are even some funds now that have 0% fees (check Fidelity!).

ETFs (Exchange-Traded Funds)

Risk level: Low to moderate

Potential returns: Similar to index funds, sometimes higher

ETFs are a lot like index funds, but you can trade them throughout the day like regular stocks. They can focus on:

• Entire markets (like the S&P 500)
• Specific sectors (like tech or clean energy)
• Specialized themes (like emerging markets)

Exchange-Traded Funds (ETFs) are like index funds with more flexibility—you can buy and sell them throughout the day like stocks. They often track indexes, sectors, or themes (think clean energy or tech innovation). They can offer a bit more growth potential than a plain index fund, but with some extra bumps along the way.

Whatever Index fund, ETF, or Stock you buy, you should be prepared to “ride with it” through ups and downs in the market. You don’t want to be the person to panic because of tariffs, sell all of your stocks, and then watch the market bounce up even higher than it was before.

Stocks

Risk level: High

Potential returns: Anywhere from huge gains to total loss

Owning stock means owning part of a single company. If that company grows, your investment can skyrocket. If it fails, your investment can disappear.

• Big upside potential, especially with small investments.
• Big downside risk—you can lose it all.
• Requires research, timing, and sometimes luck.

Many investors still keep a few stocks for the excitement and the chance at bigger rewards.

A Quick Warning

No matter what you buy—index fund, ETF, or stock—the market will go up and down. Avoid the trap of panicking during a drop, selling at the bottom, and then watching the market bounce back even higher. Staying invested through the dips is key.

So… Which Should You Choose?

Over time, a mix of all three can work well:

• Big chunk in index funds for stability.
• A few ETFs for growth and variety.
• Some individual stocks for potential big wins.
• Maybe a small slice in cryptocurrency if you’re comfortable with very high risk.

The exact mix depends on your risk tolerance, goals, and timeline—but patience is the most important ingredient.