ETFs, otherwise known as exchange-traded funds, are securities that track particular indexes in the form of commodities, bonds or other assets. ETFs are bought and sold during trading hours and work in the same manner as common stock. If you are one who is skeptical of the stock market, ETFs are a solid way to invest. ETFs are great for first-timers, or for those who've quit the market and seek a safe way back in.
The great thing about ETFs is they offer you the ability to work with a diverse array of stocks, buying and selling as many shares as you wish. According to Investopedia, if you are participating in a BRIC ETF, you can focus on stocks from BRIC nations that include Brazil, Russia, India or China, for example. This trading avenue gives you access to stocks within a particular field or industry that interests you most. You also have the ability to avoid placing all of your eggs in one basket, while allowing you to stay within your comfort zone.
You may also prefer ETFs if you desire more flexibility in terms of trading. ETFs are traded openly during trading hours; you know what type of stock you bought or sold. This activity is in stark contrast to mutual funds, where shares are traded once a day after market closings, and investors must wait until the end of the day to find out how much they traded. ETF prices also change in value as the day progresses, allowing you to shift money between stocks and bonds when necessary.
ETFs usually operate with relatively low expenses. For example, ETF traders can avoid redemption fees associated with mutual fund accounts. Additionally, ETFs are traded through brokerages that absorb fees associated with the funds. However, brokerages levy commission fees throughout the process. To avoid costly fees, invest in chapters of $1000 or more to minimize multiple fee incursions, and look for brokerage firms with lower operating costs. Brokerage firms with low start-up costs usually yield higher ETF returns.
ETFs offer certain tax advantages when compared to other investment mediums, such as mutual funds. Mutual funds yield more capital gains taxes due to the higher frequency of trading involved, and taxes are applied throughout the investment. For ETFs, capital taxes are only applied when the investor sells the ETF.
ETFs are among the best options in the market when it comes to transparency. ETFs allow you to see your investments, whereas mutual funds conceal your stock ownership. Investing in mutual funds exposes you to over-investment, so you stand a higher risk of degrading your wealth portfolio with bad investments. ETFs, however, work in your favor if you wish to have a firmer grasp on your investments, allowing you to make better decisions while trading.