Stocks, ETFs or Gold: Where Should You Invest?

Choosing Between Stocks, ETFs and Other Assets

Should you invest in one company, buy an ETF containing dozens of companies, hold gold or choose an asset designed to generate regular income?

There is no single investment that is best for everyone. Each asset has a different purpose, level of risk and potential source of return.

The right choice depends on what you want your money to achieve, when you may need it and how comfortable you are with changes in its value.

Start with your goal

Before comparing investments, define your goal.

You may be investing to:

• Build wealth over many years
• Generate regular income
• Preserve part of your savings
• Prepare for retirement
• Save for a future expense
• Diversify money you have already invested

Your time horizon is also important. This is the period for which you expect to keep your money invested.

An investor with a long time horizon may be more comfortable with short-term price movements. Someone who may need the money soon might prefer assets with less price volatility and easier access to cash.

Every investment involves some form of risk. The aim is to choose risks that match your goals and financial situation.

Individual stocks

A stock represents partial ownership in a company.

When you buy shares, your return may come from:

• An increase in the share price
• Dividends paid by the company
• A combination of both

Individual stocks give you control over the companies you own. You can research each business and select companies that match your criteria.

However, your results depend heavily on the performance of those specific companies.

A company may lose customers, report weaker profits, face new competition or experience regulatory problems. If you invest a large part of your money in one company, a single negative event could significantly affect your portfolio.

Individual stocks may be suitable for investors who are willing to research companies, follow their performance and accept company-specific risk.

Exchange-traded funds

An exchange-traded fund, or ETF, pools money from many investors and holds a portfolio of assets.

An ETF may invest in:

• Hundreds of companies from a broad market
• Companies from one industry
• Businesses from a particular country
• Dividend-paying stocks
• Sukuk or other income-producing assets
• Gold or other commodities

ETF shares are bought and sold on an exchange during market hours, similar to individual stocks.

The main attraction of many ETFs is diversification. Instead of depending on one company, your investment may be spread across many holdings.

For example, if an ETF contains 100 companies, weak performance from one company may have a limited effect on the entire fund.

However, an ETF is not automatically diversified. A fund focused on one company, industry or narrow theme may still carry concentrated risk.

ETFs also charge expenses. Before investing, check the fund’s holdings, objective, fees and strategy rather than relying only on its name.

Stocks or ETFs?

The main difference is concentration.

An individual stock gives you exposure to one company. A diversified ETF can give you exposure to many companies through a single investment.

Suppose you invest $1,000 in one technology company. If that company performs poorly, your entire investment is affected.

If you invest the same amount in an ETF holding 100 technology companies, the risk is spread more widely. However, the ETF may still decline if the entire technology sector struggles.

Individual stocks may offer greater gains if you select a successful company, but they also expose you to greater losses if that company performs badly.

A broad ETF may reduce company-specific risk, but it will still rise and fall with the market or assets it follows.

Some investors choose only ETFs. Others select individual stocks. Many use a combination of both.

Gold

Gold is different from a stock because it does not represent ownership in a business.

It does not generate revenue, profit or regular dividends. Your return depends mainly on whether its market price rises or falls.

Investors may hold gold to diversify their portfolios or preserve part of their wealth during periods of economic or market uncertainty.

Gold prices can be affected by:

• Inflation expectations
• Interest rates
• Currency movements
• Central bank activity
• Geopolitical events
• Investor demand

Gold can still experience significant price movements. It should not be considered free of risk.

Investors can gain exposure through physical gold or exchange-traded products. These methods may involve different ownership structures, fees, storage arrangements and risks.

Muslim investors should also check whether the chosen gold product follows the relevant Shariah requirements for ownership, possession and trading.

Real estate investment trusts

A real estate investment trust, or REIT, allows investors to gain exposure to income-producing property without directly buying a building.

A REIT may own assets such as:

• Residential buildings
• Warehouses
• Shopping centres
• Hotels
• Offices
• Healthcare facilities
• Data centres

Publicly traded REITs can be bought and sold on an exchange like stocks.

Their returns may come from distributions and changes in their share prices. This can make them attractive to investors seeking income and real estate exposure.

However, REITs have their own risks. Property values and rental income may fall. Higher financing costs can also affect heavily indebted REITs.

A REIT focused on one property type or location may be less diversified than it first appears.

Sukuk

Sukuk are Shariah-compliant financial certificates linked to ownership rights in underlying assets, projects or investment activities.

They are often used by governments and companies to raise money. Investors may receive periodic distributions generated through the structure and may receive their principal at maturity, subject to the terms and performance of the sukuk.

Sukuk may offer more predictable income than stocks, but they are not free of risk.

Risks may include:

• The issuer failing to meet its obligations
• Changes in market prices
• Difficulty selling before maturity
• Currency movements
• Risks connected to the underlying assets
• Differences in contractual structures

Before investing, review the issuer, maturity date, expected distributions, underlying assets and Shariah certification.

Savings and cash-based products

Savings products can be useful for money that you may need soon or do not want to expose to major market movements.

Depending on their structure, they may provide a known or expected profit rate for a particular period.

They can be useful for:

• Emergency funds
• Short-term goals
• Money waiting to be invested
• Reducing the overall volatility of a portfolio

The trade-off is that their long-term return may be lower than the potential return from growth assets such as stocks.

Access conditions also matter. Some products may restrict withdrawals or reduce the expected profit if money is withdrawn early.

Muslim investors should check how the product generates returns and whether its structure has been reviewed for Shariah compliance.

Compare the main features

Each asset can serve a different purpose.

Individual stock

• What you own: Part of one company
• Possible return: Price growth and dividends
• Main risk: Company-specific losses

ETF

• What you own: Part of a portfolio
• Possible return: Depends on the assets held
• Main risk: Market risk and fund concentration

Gold

• What you own: Physical gold or exposure through a product
• Possible return: Increase in the gold price
• Main risk: Price movements and product structure

REIT

• What you own: Shares in a property business
• Possible return: Distributions and price growth
• Main risk: Property, financing and market risks

Sukuk

• What you own: Rights linked to assets or investment activities
• Possible return: Periodic distributions and possible repayment at maturity
• Main risk: Issuer, market, liquidity and structural risks

Savings product

• What you own: Money placed under a defined financial structure
• Possible return: Expected profit or return
• Main risk: Provider, inflation and withdrawal conditions

These descriptions are general. Products within the same category can have very different structures and risks.

Think about diversification

Diversification means spreading your money across different investments instead of depending on one company or asset.

For example, a portfolio may include stocks for long-term growth, sukuk or Shariah-compliant savings for income and stability, and gold for additional diversification.

Diversification can reduce the effect of one investment performing poorly. It cannot guarantee a profit or prevent all losses.

Owning several investments does not always mean you are properly diversified. Five technology stocks may still respond to the same industry risks. Several ETFs may also hold many of the same companies.

Check what you actually own inside each investment.

Check Shariah compliance

An asset category is not automatically Shariah-compliant.

Individual stocks may need to pass checks related to business activities and financial ratios. ETFs may contain companies or assets that do not meet Shariah standards.

REITs should be reviewed for their activities, tenants, financing and financial ratios. Sukuk and gold products should also be checked for their specific structures.

A Shariah-compliant screening process can help you determine whether an investment meets the required criteria. Its status may change over time, so compliance should be monitored regularly.

Build around your needs

Imagine an investor with a long-term goal who can accept market fluctuations.

They may choose a diversified stock ETF as the main part of their portfolio, then add selected individual stocks after conducting further research.

Another investor may prioritise regular income and lower volatility. They may prefer a larger allocation to sukuk or a Shariah-compliant savings product, while keeping a smaller amount in stocks.

Neither approach is automatically correct. The appropriate mix depends on:

• Your goal
• Your time horizon
• Your need for income
• Your ability to accept losses
• When you may need access to the money
• Your knowledge of each investment
• Your Shariah requirements

You do not have to choose only one asset. Different investments can work together, with each serving a particular role.

Quiz

Question 1

What is the main difference between buying one stock and buying a broad stock ETF?

• A. A stock always produces income, while an ETF does not
• B. A stock gives exposure to one company, while a broad ETF may hold many companies
• C. An ETF cannot decline in value

Correct answer: B

An individual stock depends on the performance of one company. A broad ETF spreads the investment across several companies, although it can still lose value.

Question 2

Which investment does not generate business earnings or dividends?

• A. Gold
• B. A stock
• C. A REIT

Correct answer: A

Gold is not a business and does not generate revenue or profit. An investor’s return mainly depends on changes in its market price.

Question 3

What should you consider first when choosing between different assets?

• A. Which asset performed best last month
• B. Which investment is most popular online
• C. Your goal, time horizon and ability to accept risk

Correct answer: C

The appropriate asset depends on what you want to achieve, when you may need the money and how much price movement you can tolerate.

Sources

• https://www.investor.gov/additional-resources/general-resources/publications-research/info-sheets/beginners-guide-asset
• https://www.investor.gov/introduction-investing/investing-basics/investment-products/stocks
• https://www.investor.gov/introduction-investing/investing-basics/investment-products/mutual-funds-and-exchange-traded-2
• https://www.investor.gov/introduction-investing/investing-basics/glossary/exchange-traded-fund-etf
• https://www.investor.gov/introduction-investing/investing-basics/investment-products/real-estate-investment-trusts-reits
• https://www.investor.gov/introduction-investing/investing-basics/glossary/asset-allocation
• https://www.worldbank.org/en/news/feature/2015/10/26/what-are-sukuk
• https://blogs.worldbank.org/en/allaboutfinance/sukuk-are-just-another-capital-markets-instrument-and-good-thing
• https://www.gold.org/goldhub/research/relevance-of-gold-as-a-strategic-asset
• https://www.ifsb.org/wp-content/uploads/2023/10/IFSB-19-Guiding-Principles-on-Disclosure-of-ICM-Products-final.pdf

Frequently asked questions

What should you consider first when choosing an investment?

Start with your goal, time horizon and ability to accept risk. Your income needs, access to the money, knowledge of each investment and Shariah requirements also affect the appropriate mix.

What is the main difference between individual stocks and ETFs?

An individual stock gives you exposure to one company. A diversified ETF can spread your investment across many companies, reducing company-specific risk, but it can still lose value. An ETF focused on a narrow industry or theme may still carry concentrated risk.

Does gold generate income or dividends?

Gold does not generate revenue, profit or regular dividends. Its return depends mainly on changes in its market price. It may support diversification, but it can still experience significant price movements.

Are sukuk free of risk?

No. Sukuk may offer more predictable income than stocks, but risks include issuer default, market price changes, difficulty selling before maturity, currency movements, underlying asset risks and differences in contractual structures.

Is an asset category automatically Shariah-compliant?

No. Each investment should be checked individually. Stocks may require business activity and financial ratio checks, while ETFs, REITs, sukuk and gold products require reviews of their holdings, activities or structures. Compliance should be monitored regularly because its status may change.

Related terms

• Halal Stocks
• ETFs