Are you a beginner in the big world of investments or a pro looking for some diversity? If so, you have heard about funds a lot. Yes, they are more efficient and yes, they significantly decrease the risks of losing your assets but which fund should you choose? There is one particular type of funds called Exchange-Traded Funds or simply ETFs that you should be definitely considering.
What is an ETF?
To avoid all the complexity and confusion, let's define ETFs with a simple example. Suppose you need to do shopping for your house and you need different things like grocery, toiletries, and some garden tools. Ideally, you would prefer going to a store, where they have all the things you need, so you run all your errands in one place. Moreover, you won't have to worry about stores being closed in case you do not get there on time. This, of course, will save you a lot of time and energy. The same applies to ETFs, they are a basket of stocks, bonds or commodities that can be traded any time of the day similar to stocks. Since your ETF can include securities of various fields, you get exposed to different areas of the market. Basically with ETFs, you save research and analysis time.
Tell me more about the benefits of the ETFs
Generally, it all comes down to one huge advantage, which is a savior when it comes to risks. No need to drum your fingers on the table because here comes the savior- DIVERSIFICATION. ETFs should be your go-to option in making a diverse portfolio with low expense ratio, which we will talk about later. Another benefit that ETFs deserve credit for is the letter T. No, it is not my favorite letter, neither is it a joke: the letter T in the acronym stands for trade, which in its turn refers to the flexibility of buying and selling or what we call in investment, liquidity. Unlike mutual funds that can be sold only at the end of the day, ETFs act like stocks and are up for sales 24/7. Even though the main purpose of the investment is to get a profit, it does have costs such as recordkeeping, transfer agents, and other related fees. ETFs have relatively low costs because they do not require records or agents. Nonetheless, there are trade fees and before you purchase anything, make sure you are familiar with all the expenses from A to Z.
What else do I need to know about ETFs?
There are two main ways you can get profit from ETFs, a) a rising ETF price, b) dividends. However, getting dividends is not so common with ETFs because usually, instead of being paid to the shareholder, the dividends are reinvested.
If you decide to form your ETFs on a field-specific basis, that is to say, buy different stocks that belong to the same field, note that they can act differently. For instance, if you buy 5 stocks from Tech-related fields, it does not mean if x stock rose, the z stock will jump high as well. The point is, do your research and pick the stocks, bonds, etc. wisely.
Limit orders vs. Market orders. The first one means you sell your funds at the best possible price, which might work for a short time but definitely not in a long run. A limit order is about setting regulations, the mantra is, "I buy at a certain price or below, I sell at a certain price or above." My advice is always to give the preference to limit orders.
Remember that ETFs are there to simplify your investment and provide you with the best possible outcome. However, it is all in your hands and a lot depends on your decisions. Keep in mind that there are professionals whose job is to follow the market and share their findings with current and potential shareholders via investment newsletters. With this and other resources, you can be the next Warren Buffett.