What Is An ETF?

By | November 20, 2013

If you have heard of this term and are unsure what it means in the investing world then you might be missing out on a great product and a great way to build a great portfolio. The term stands for Exchange Traded Fund; it is a group of assets that track an index and is similar to an index fund in that way but it is traded like a stocks and shares on the financial markets.

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The prices of these items can change throughout the day as they are bought and sold in relatively quick time. If you owned index fund you would be able to know the net asset value daily but this is not the case with the exchange traded fund.

Buying and selling

What you will be buying if you opt for an ETF is a great mixture and this allows you to have the best parts of an index fund and trading on stocks and shares mixed into one fantastic little product. You also have the ability to short sell, this is selling of stocks or shares that you don’t actually own.

With the ETF’s you are able to purchase what you want and are not restricted in any way in having to purchase large amounts, the other benefit that you will notice with the ETF’s is the price, they are cheaper to purchase than a mutual fund and this can mean that you are able to buy more of the item for your money than you would have if you were looking at the mutual fund option. The price to buy and sell this item is the same as what you would pay if you were looking to purchase or sell a normal stock option.

Spider

One of the most well-known ETF is called the spider this one tracks the S & P 500 Index. The trade symbol is ‘spy’. This was one of the largest ETF’s in the world and it trade on the New York stock exchange.

What was first started in 1993 have now grown and developed into a very successful option that you should seriously consider. Each ETF”s  have their own unique trading symbol and the cost of each unit is reflected in the tracking of the index that it is following.

The concept behind the ETF is they have a fixed number of shares in the index that they are following, because they have shares in the companies it does mean that there are some voting rights but there will be different rules and regulations depending on the ETF that you purchase.

Portfolio

Having a balanced portfolio is important and this needs to be planned and managed to form the correct balance that meets your needs and represents the risk that you are comfortable with taking on the stock market.

There are some great benefits that you can get if you use ETF’s to build your portfolio.

  • The fees are lower than what you would need to pay if you were looking at purchasing a mutual fund. You pay the basic price of a transaction to purchase an ETF.
  • These are more easily bought and sold to create easy access to your funds and to make money in the short term if you are looking for something to fill a short term gap.
  • The combinations that you are able to purchase give your portfolio a unique touch and these combinations can be from an actively managed fund or a passively managed fund giving even more options.
  • You are investing directly into the spider and this gives greater flexibility and increases the chances of growing money.
  • It is a great way to limit cash on your portfolio; it means that if you have spare funds you have the ability to invest in a product that can be short term as well as a long term option.

This is a competitive market and with the ETF’s being so clear it can become difficult for other companies to make commission on the sale of these. This is why you tend not to have them recommended by some of the investors that are trying to make the most commission. The ETF’s are there for the investors and not the managers, they are a great tool that you can use in a variety of different ways.

Purchasing

It is possible to purchase these as you would by normal stock and to keep the costs down even more it is great to find the best deals possible, look out for the discount brokers; they don’t offer any advice they are there to secure your deal for you. Look for the investments that have minimal fees, this will allow you to invest more money in the stock rather than paying fees.

It gives the individual investor the opportunity to purchase items in the markets that are normally only available to the larger institutions.

Passive and active trading

These terms are used quite frequently and many new investors might feel that they are missing important factors if they are unable to get the correct information.

Passive trading is purchasing of an ETF and then holding on to that investment for a period of time. This type of purchasing is acceptable, and you should not feel pressured into the faster paced trading that is called active trading.

Active trading is more for the fast paced individuals that want to see how things are moving during the day and are able to buy and sell to try and make the most gains. With this style of trading you need to be covering the cost of the trades with the purchasing and subsequent selling of the ETF’s. This will increase the amount of money that you will need to be making but it is possible to win at this market.

But before you take the plunge make sure that you truly understand the area that you are looking into, do your homework first.

What ETF’s have you chosen?

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