You can invest in almost anything with an ETF in today’s digital age.
ETF stands for exchange-traded fund, and these funds make it possible to track specific indexes or sectors, allowing you to invest in the stocks of a particular industry or group of companies all at once.
Investing with ETFs is a great way for beginners to enter the investing world and grow their assets over time. In this article, we’ll look at what ETFs stand for, how they work, and why you might want to invest with them so you can get started on investing with ETFs as a beginner investor.
What are ETFs?
ETF stands for Exchange Traded Funds. An ETF is a fund that owns a collection of assets such as stocks, bonds, commodities, or any other asset class. ETFs are traded on the stock exchange just like stocks and can be bought and sold anytime during the trading day.
The most important thing to note here is that when you buy an ETF, you are not buying the stocks in which the ETF is invested. Instead, you own a portion of the ETF that owns the stocks. Therefore, the price movement of an ETF does not reflect the price change of the underlying stocks.
Why Invest With ETFs?
With ETFs, there is no single stock risk, and you don’t have to spend much time researching and analyzing stocks individually. However, you do not miss out on the chance to invest in high-growth stocks.
The best part is that you don’t have to spend hours researching stocks and reading financial statements every day. The ETFs do that for you and then decide which stocks to buy and sell.
Most importantly, given the huge volatility in the stock market, it is imperative that you start investing as soon as you can so that your money can work for you.
Although it is better to start investing early on, it is never too late to start investing with ETFs. Even if you are an experienced investor or a newbie with little cash saved up on the side, you can always use ETFs as a part of your portfolio.
How To Invest With ETFs?
You can buy and sell ETFs just like stocks. You can contact a broker or go to a Robo-advisor website and sign up for a free account.
If you go the Robo-advisor route, you don’t have to pay a commission for each transaction because it is integrated into the management fee of the ETF. You can select a few ETFs from different asset classes depending on your financial goals and risk appetite.
For example, if you want to start investing with ETFs and park your money in the stock market, you can start with equity ETFs such as S&P 500 ETFs, broad market ETFs, or hybrid funds.
Things To Consider Before Investing With ETFs
The underlying stocks: It is important that you understand the underlying stocks that the ETF holds. For example, if you are investing in an ETF that holds biotech stocks, you must know that the biotech industry is very risky. Therefore, you must be prepared to take on more risk than someone invested in a utility ETF.
The ETF’s Management Team
The management team behind the ETF is responsible for deciding what stocks to buy and sell. Therefore, you must check out the track record of the management team. You can also check the management team’s background by looking up their LinkedIn profiles.
The Expense Ratio
You must understand the expense ratio of the ETF. The expense ratio is the amount the ETF management team charges per year to manage your fund. An expense ratio of 0.5%-1% is normal for equity ETFs and a bit higher for bond ETFs.
How To Read an ETF Prospectus?
The prospectus is the most important part of an ETF. The prospectus is a legal document that lays out all the details of the ETF fund. The prospectus also includes the risks involved while investing in the ETF.
The first few pages of the prospectus are generally where you will find important information such as the fund objective, risk factors, and other important information. In the risk factors section, you will find a detailed description of the risks involved while investing in the ETF.
The stock market has seen both extreme highs and lows throughout the years. Therefore, it is important to stay disciplined and focused on your long-term goals when investing in the stock market. You can achieve this by investing in ETFs and letting the investment ride out the ups and downs of the market. There will be times when the market will go down, but as long as you stay invested, your long-term goal will be achieved.
Remember, the best time to start investing with ETFs was yesterday. The second best time is today!