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ETF Basics for Beginners

When you start researching possible types of investment it is easy to find your eyes glazing over and your brain switching off.

After all, there are many rather dull phrases and acronyms that don’t appear to be even remotely interesting. Take ETF, for example. This is a boring looking phrase but you would be well advised to keep your brain switched on while you find out more about them.

What Are ETFs?

The full name for ETFs is exchange traded funds. They are basically funds made up of diverse investments put together as packages by big financial companies. They are usually made up of stocks, commodities or bonds. The whole package is then authorized and released on the market. You can then choose to buy and sell them, just as you would with regular stocks and shares.

The Benefits

Probably the biggest benefit to ETFs is that they offer a diverse form of investment made very simple. If you want to invest in a diverse way with normal stock then you will need to do a lot of research and buy into a number of different companies. Of course, this involves a bit of work on the investor’s behalf. An ETF makes it a lot easier to diversify without any hassle. The fact that it covers a number of different investments in it means that it potentially will be less volatile than an individual piece of stock. Another advantage is that it can be a smart choice when you want to invest in a certain industry but don’t know which company will perform best. ETFs are popular in emerging sectors such as medical research and biotech. There are lots of different companies in these industries that could make the next big breakthrough and an ETF can cover a number of them, giving you a better chance of investing in the right one. They also offer the possibility of investing in a certain economy or part of the world without getting too specific.

The Drawbacks

The flip side of ETFs is that you probably won’t expect to see such big financial gains as you would hope for with a straight stock investment. If we look at that example of emerging industries such as biotech again we can see how this is the case. Let’s say that one of the companies in your ETF has a massive breakthrough and their value rockets. This is clearly good news but the less exciting companies in the rest of the ETF may drag down the gains if they stay the same or lose ground. There are also typically some fees involved in holding an ETF, although these are generally lower than with many other types of investment.

Who Would Buy an ETF?

There are a number of different types of investor who could be interested in choosing an ETF to invest their money in. For example, you might be interested in the stock market but be completely new to it. If you don’t have the time or inclination to check out a lot of different company’s track records then an ETF is an easier investment to make. You might also want to avoid too much volatility and be happy to invest in an ETF for this reason. As we have already seen, you might like the idea of putting some money into a certain type of industry or economy but not be sure which specific company to invest in. All of these are very good reasons for looking at an ETF instead of a typical stock investment.

Do you like sound of an ETF investment or is it not the kind of thing you are keen on?

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One Response to ETF Basics for Beginners

  1. Michelle says:

    I have just started my investment journey. I am not sure where I am going with it, but it is posts like this, that make me feel a little more normal for all of the questions I have.
    Michelle recently posted…A Self-Employment Tax HolidayMy Profile

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