Stocks. They’re one of the most well-known and commonly traded investments out there.
Stock exchanges have been around for centuries, have a long and complex history, and offer various benefits to investors — human progress births new technologies and new investment opportunities.
One of the most popular new investment opportunities of the 21st century is cryptocurrency. But fundamentally, what’s the difference between these two types of investment?
To understand the key differences, you must first understand each asset class.
What Are Stocks?
Stocks, or equities, are a type of investment that represents ownership in a company. When you buy a stock, you buy a tiny piece of the company that issues the stock.
So, for example, if you buy one share of Apple stock, you own a small fraction of the company. However, ownership tends to be a bit of a misnomer, as stocks don’t confer actual ownership rights in every case.
Instead, they give the holder certain voting rights (depending on share class) and the potential to earn dividends, but every company is different and structures its equity differently.
Dividends are profits that a company chooses to share with its shareholders and are usually paid out quarterly.
They provide income for investors, one of the main reasons people invest in stocks. In addition, when a company does well, and its stock price goes up, shareholders can make money through capital gains.
This happens when they sell their shares for more than they paid. Put simply, if you buy a stock for $100 and it goes up to $120, you’ve made a $20 capital gain.
As mentioned, stocks also come with voting rights. These vary depending on the type of stock, but generally, the more shares you own, the more votes you get. However, companies will often divide shares into classes, each having different voting rights.
For example, Class A shares might have 100 votes per share, while Class B shares might have ten votes per share. This allows companies to issue shares without giving up too much control.
In addition, this voting structure enables companies to limit power to C-suite executives, institutional investors, and other large shareholders.
Types of Stocks
There are two main types of stocks: common stock and preferred stock. Common stock is, as the name suggests, a stock that makes up the vast majority of stocks issued by companies — stocks like Tesla, Apple, and Google.
Common stockholders have voting rights and are usually entitled to dividends, but they claim less of a company’s assets than preferred shareholders.
Preferred stocks give holders priority over common shareholders regarding dividends and asset claims.
For example, if a company goes bankrupt, common shareholders will only receive assets after preferred shareholders have been paid in full. Similarly, when a company disperses dividends, preferred shareholders will be paid before common shareholders.
Stocks are also grouped into indices or baskets of stocks that share specific characteristics.
For example, the Dow Jones Industrial Average (DJIA) is a stock index that includes 30 large, publicly traded companies. As one of the oldest and most well-known stock indexes, the DJIA is often used as a benchmark for the entire stock market.
Other popular stock indices include the S&P 500, Nasdaq Composite, and the Russell 2000.
Stock indices provide a way for investors to track the overall performance of a group of stocks rather than just one individual stock.
This is helpful because it allows for context — if the DJIA is up, but your particular stock is down, you know that the stock market is still performing well despite your individual stock’s loss. As such, indices can be a good barometer of the stock market’s health.
An exchange-traded fund (ETF) is a type of security that tracks a particular index, commodity, or basket of assets.
ETFs are different from stock indices because they can be traded like stocks on an exchange. Unlike mutual funds, you can buy and sell ETFs just like you would buy and sell individual stocks.
ETFs provide a way for investors to get exposure to a particular index or group of assets without purchasing each security individually.
For example, if you wanted to invest in the S&P 500, you could purchase an ETF that tracks the index. This would expose you to all 500 stocks in the index rather than just one.
The main advantage of ETFs is diversification. ETFs can be used to invest in almost anything. For example, some ETFs track the stock market’s performance, bonds, commodities, and even entire economies, making them versatile tools for investors.
Cryptocurrencies are digital currency tokens that use cryptography to secure their transactions on the blockchain and control the creation of new units.
Cryptocurrencies are often more decentralized than traditional fiat currencies, which central governments back. The first and most well-known cryptocurrency, Bitcoin (BTC), was created in 2009.
Cryptocurrencies are often traded on decentralized and custodial exchanges and can be used to purchase goods and services. Some governments have even begun to accept cryptocurrencies as a form of payment for taxes, fees, and other services.
In 2021, El Salvador became the first country to adopt Bitcoin as an official legal tender. In the coming years, other countries may follow suit.
Cryptocurrencies have several advantages over traditional stocks.
You can trade cryptocurrencies around the clock, 365 days a year. Traditional stock markets are only open for trading during specific hours, usually 9:30 AM to 4:00 PM EST. Gone are the days of waiting for the market to open to make your trade, only to find that the price has moved against you.
When buying cryptocurrencies, you can do so without needing a go-between, such as a brokerage or exchange. This saves you money in fees and gives you more control over your investment.
While several custodial exchanges like Coinbase, Gemini, and Crypto.com exist, you can also store your cryptocurrencies on a non-custodial wallet, like MetaMask or MyEtherWallet, which gives you complete control over your private keys.
No Central Authority
Cryptocurrencies are decentralized, meaning there is no central authority or government that controls them. Decentralization eliminates the red tape and bureaucracy that can slow down or even stop traditional financial transactions.
Cryptocurrencies know no borders. So whether you’re a hot-shot trader in New York City, a small-time investor in Brazil, or someone looking to send money to family in India, cryptocurrencies can facilitate the process.
All you need is an internet connection, and you can send or receive any amount of money to anyone, anywhere in the world.
Low Barriers to Entry
You can start investing in cryptocurrencies with very little money. You can even begin trading some cryptocurrencies with as little as a few cents.
In addition, cryptocurrencies bolster accessibility and inclusion by allowing anyone with an internet connection to start investing, regardless of their financial status.
While certain exchanges require more identification than others to set up an account, many decentralized exchanges only require an email address or, better yet, just an online or hardware wallet.
When you buy or sell cryptocurrencies, the prices are generally much lower than those associated with traditional stocks and other assets. For example, Coinbase Pro charges maker and taker fees of 0.5 percent and below.
Using decentralized crypto exchanges like Uniswap, the costs can be even lower, as there are no custodians to pay.
Disadvantages of Cryptocurrencies
While cryptocurrencies have many advantages, there are also some disadvantages to consider before investing.
Cryptocurrencies can be incredibly volatile and fluctuate rapidly. The crypto markets tend to operate in wild, boom and bust cycles, which can cause headaches for risk-averse investors (even crypto veterans).
Cryptocurrencies can sometimes decrease over 80 percent in value from their all-time highs in just a few months. You’ll want a high-risk tolerance if you invest in crypto, whether Bitcoin or an altcoin.
However, they can also increase in value just as quickly, making crypto trading one of the most lucrative short-term investment vehicles. Indeed, the profit possibilities are more significant than stock trading or investment portfolios filled with index funds.
For example, in 2020 and 2021, Bitcoin appreciated from around $4,000 to over $65,000 in months.
Hacking and Fraud
Cryptocurrency exchanges and crypto wallets often target hackers and scammers. Poor security and lax regulation of these platforms can lead to the loss of customer funds.
In addition, because some crypto investors store their assets online or in hardware wallets, they’re on the line if their private keys are compromised in a hack.
Because crypto assets are decentralized and not subject to government regulation, a higher risk is associated.
While this is changing as regulatory bodies like the SEC (securities and exchange commission) start to guide digital asset investing, the lack of regulation still poses a risk for investors.
Complicated for Novice Investors
The cryptocurrency market can be challenging for new investors. Between the volatile prices, the complex technology, and the jargon, it can be challenging to wrap your head around everything that’s going on.
This can make it hard to make informed investment decisions. Furthermore, some projects exist to scam investors out of their money, so it’s essential to do your research before investing in anything.
Stocks have been around for centuries and have a proven track record. Reputable companies have built a reputation over time, and investors know what to expect from them.
With cryptocurrencies, however, there is no such thing as a reputation that compares to a blue-chip stock. The industry is still in its early stages, and most projects are relatively new.
While cryptocurrencies like Bitcoin and Ethereum have a bright future, there is still a lot of uncertainty surrounding them.
What To Take Away
Cryptocurrencies and digital assets are disrupting the traditional financial system. They have several advantages over conventional investments like stocks, including 24/7 trading, global accessibility, and lower fees.
However, they’re also more volatile and less regulated than stocks, making them riskier investments.
Whether you’re investing in crypto or stocks, it’s essential to do your research and understand the risks before putting any money down.
Unfortunately, research can be tricky, so considering Sarson Funds for your crypto and digital asset investing needs may be a good idea. Sarson Funds offers cryptocurrency education, crypto financial advising, and various digital asset investment products.
Consider Sarson Funds a one-stop shop for all your digital asset investing needs. Check out Sarson Funds’ website to get started on your crypto journey.