What Is an ETF? Everything You Need to Know
August 17, 2020
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If you’re getting into investing, you’ve probably asked yourself: what is an ETF?
Exchange-traded funds or ETFs are basically baskets of investments that you can invest money into.
ETFs can be made up of bonds, commodities, real estate, stock, or other assets.
This article will cover all the basics about investing in ETFs.
Investing in stocks
Before we dive into ETFs, we need to talk about stocks.
A stock is a piece of a company that you can buy and sell. When you own a company’s stock, you own a piece of the company.
The stock loses or gains value depending on how the company performs. If the company does well, the stock gains value. When it does poorly, the stock loses value.
Stock is sold on an exchange. There are stock exchanges all over the world, but most people in the U.S. buy and sell stock on the New York Stock Exchange (NYSE), which is the largest exchange in the country.
The stock market is all the activity that happens on stock exchanges.
Stocks vs ETFs
Now that we know what stock is, we can see how it relates to ETFs.
One piece of stock represents one share in a single company. When you buy or sell that stock, you buy or sell one piece of that one company.
ETFs are baskets of investments. That means, buying into a single ETF can mean that you’re investing in multiple companies or assets like gold or real estate.
The different types of ETF
These are some of the most common types of ETF:
- Bond ETF
These include investments like corporate bonds, municipal bonds, state bonds and government bonds.
- Commodity ETF
These include investments like gold, oil, coffee, sugar, milk, cotton and almost any other kind of commodity.
- Currency ETF
These include investments like Euro, Canadian dollar, Swiss franc and Indian Rupee.
- Industry-specific ETF
These include investments based on industries like banking, energy, and technology.
- Real estate ETF
These include investments like real estate companies, and Real Estate Investment Trusts (REITs).
As always, research before you invest. You can never know too much when you’re putting your money to work.
How to Buy ETFs
To trade on an exchange you’ll need a broker.
Brokers are professional traders who are registered with exchanges.
When people want to buy or sell something on an exchange, they contract a broker to do it for them.
These services usually come at the cost of a fee.
If you’re going to start investing in ETFs, you’ll need a broker.
There are now options for online brokers and traditional brokers. The cost and services provided vary, so shop around before you settle on one.
The main thing to look at is whether the broker manages actively or passively.
Actively-managed ETFs mean that the broker buys and sells investments of the ETF. These services cost more than passively-managed ETFs.
Brokers take a more hands off approach with passively managed ETFs.
Some popular online brokers are E*trade and TD Ameritrade. Both are great options for beginners.
Once you start investing, your money will be at risk. Remember there is no such thing as a safe investment.
Good luck and always do your research.
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