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[Prefer to listen? You can find a podcast version of this article here: E4: Stocks, ETFs, and Mutual Funds.. Explained Simply]

If you tuned into this week’s episode of the WNOTU podcast, you know we finally stepped into one of my favorite topics: investing. If you want to create long term wealth for yourself and keep up with the rising cost of pretty much everything these days, understanding the basics of investing is a necessary step. My goal in the episode in this article is simple. I want you to walk away with a solid understanding of three core investment tools that show up everywhere in personal finance: stocks, ETFs, and mutual funds.

Today is all about building your investing vocabulary. In the upcoming episodes and posts, we will move on to how to actually get started and what healthy long term habits look like. But first, we have to learn the basics.

What Even Is the Stock Market?

We hear about the stock market constantly. It is up. It is down. It is shaped like a V. Sometimes like a K. It gets confusing fast, and the basic concept of it can easily get lost. So let’s break it down.

Imagine a giant farmers market. Instead of stands selling tomatoes and handmade soap, each stand represents a company. The people walking around are buying tiny pieces of those companies. That farmers market is the stock market.

When you own a stock, you own a teeny tiny piece of a company. If Microsoft were a pizza, owning one share would basically get you a crumb. But that crumb is still yours!

When we say the market is “up” or “down,” we are talking about stock prices. Prices move because of supply and demand, which takes us right back to Econ 101. If more people want to buy a stock, the price goes up. If more people want to sell, the price goes down. Why people feel like buying or selling usually comes down to expectations, emotions, news headlines, and a whole lot of investor drama. The stock market can feel like one giant group chat where everyone is reacting in real time.

Here is the part I really want you to remember. In the short term, stock prices do not always reflect a company’s true value. your iPhone is not suddenly worse or inherently less valuable. Short term price swings can be influenced by political uncertainty, tariffs, earnings expectations, or new innovations, especially right now with everything happening in tech and AI.

But over long periods of time, the stock market has historically trended upward. That long term growth is what makes investing such a powerful tool for building wealth. If you want to learn more about why that growth matters, check out my blog post on the power of compound interest.

What Exactly Is a Stock?

A stock represents ownership in a single company. There are different categories of stocks that behave differently.

Growth stocks are companies growing quickly and reinvesting profits back into the business. Think tech and innovation. They can grow faster, but they are usually more volatile.

Value stocks are companies that appear to be priced lower than what they are actually worth. Investors believe the market has overlooked something and the stock could catch up later.

Dividend stocks pay you a portion of the company’s profits on a regular basis. These tend to be mature, stable companies that provide steady income.

Companies also come in different sizes:

• Large cap: the established giants worth more than $10 billion.
• Mid cap: companies between $2 and $10 billion, often in a growth phase.
• Small cap: companies under $2 billion, usually earlier in their journey and more volatile.

Owning individual stocks can be fun and exciting. It can also be risky. If one company struggles, your investment takes the hit. That is why so many investors use funds instead.

ETFs and Mutual Funds Explained

Up to this point, we have talked about owning a single company. But what if you want to invest in a collection of companies at once? That is where funds come in.

Think of funds as baskets. When you buy one fund, you automatically get a tiny piece of all the companies inside that basket.

ETFs: Exchange Traded Funds

ETFs are the crowd favorites for a reason. They are diversified, low cost, and incredibly easy to buy. You can trade them throughout the day just like a regular stock. If you want to buy at 10:17 AM and sell at 2:42 PM, you can. They are flexible and super beginner friendly.

Mutual Funds

Mutual funds are very similar, but they operate a little differently behind the curtain. Instead of trading all day long, mutual funds only price and trade once per day after the market closes. Some mutual funds are straightforward index funds, but many are actively managed. That means a real person or team is handpicking what goes inside the fund based on a specific strategy.

Now here is the catch. Since managers are buying and selling throughout the year, mutual funds can create something called a capital gain distribution. This is a payout you might see toward the end of the year when the fund sells something at a profit. Even if you did not sell anything, you can still owe taxes on that payout if your mutual fund is in a taxable brokerage account.

If the mutual fund is inside a retirement account like a 401(k) or Roth IRA, you will not owe taxes on these distributions. This is why many investors keep mutual funds in retirement accounts and lean on ETFs in taxable accounts.

Index Funds

Index funds are the simplest type of fund. They track a market index like the S&P 500 or the Russell 2000. There is no guessing, no forecasting, no stressed out fund manager trying to predict the future. They just follow the companies inside the index.

An index fund can come as either a mutual fund or an ETF. The wrapper changes, but the goal is the same: match the market.

The fun part is that there is a fund for almost anything you can imagine. International companies, tech innovators, small value stocks, blended stock and bond portfolios. If there is a theme, there is probably a fund built for it.

As an avid baker gearing up for the holidays, please indulge my cookie analogy:

• A stock is like buying one cookie.
• An ETF is like buying a box of assorted cookies.
• A mutual fund is also a cookie box, but curated by a baker who charges for their time and expertise.

Comparing Stocks, ETFs, and Mutual Funds

Let’s break it down simply.

Risk

• Stocks are higher risk because your money depends on one company.
• ETFs and mutual funds are lower risk because they spread your money across many companies.

Cost

• Stocks have no management fees.
• ETFs usually have very low fees.
• Mutual funds can have higher fees, especially if actively managed.

Convenience

• Stocks require you to choose each company on your own.
• ETFs and mutual funds give you built in diversification with one purchase.

For most new investors, funds make the process easier and less stressful.

Why This Matters for What Comes Next

Now that you understand stocks, ETFs, and mutual funds, you have the foundation you need for Investing 101. This episode was the ingredients. Next time, we dive into the recipe. We will talk about how to actually begin investing, what accounts to consider, and how to build long term habits that support your goals.