If you’re a beginner investor, ETFs will offer you tons of benefits such as overabundant liquidity, diversification, low-expense ratios, low-investment threshold, and a range of investment choices. They also offer various benefits and trading strategies to new investors and traders. Although there is a huge amount of investment options available. It can easily become overwhelming for new investors or seasoned investors. So how can one choose and why are ETFs so special? And most importantly, why are they considered a better option than mutual funds? To find the answer to these questions, you must understand the basics of Exchange-traded Funds and learn how to invest in them. Here’s how to start.
What Are ETFs?
ETF is short for exchange-traded funds, which allows investors to purchase any number of bonds, stocks, and commodities they want at once. They can be seen like grocery baskets, you fill them with all the groceries you need, and at the end, you purchase them all at once. However, with ETFs, you purchase bonds and stocks instead of milk and eggs. They are also traded on an exchange taking place every day. There are millions of ETFs to invest in, some holding bonds, some holding many stocks, and others track the performance of certain market sectors or a certain index. For example, the pharmaceutical sector, health care, or communications. This is why exchange-traded funds are considered a perfect option for beginner investors. Even so, you’ll still need to understand the difference between ETFs and mutual funds to know why they are a better option.
The Difference Between ETFs and Mutual Funds
Although ETFs and mutual funds sound the same, they have a few differences that tell them apart. There are many available resources online where you can gain knowledge to better understand these funds, however, you can keep reading for a shortened explanation of the matter, or, as trade educators would propose to visit NetPicks.com, you can understand the similarities and differences between both funds. First of all, mutual funds trade one time per day which is after the market closes. However, with exchange-traded funds, trading happens throughout the day. Another difference between them is that ETFs tend to be cheaper than mutual funds; mainly because they have lower management fees. Most of them are managed in an indirect way as people usually buy and hold ETFs that track an entire market index. The management fees for ETFs are considerably low since there isn’t much buying and selling involved in this long-term strategy.
On the other hand, mutual funds are considered actively managed funds which indicates the existence of a fund manager who actively selects investments and tries to outperform the market at every possible chance. Due to these human efforts involved in the process as well as the frequent buying and selling, mutual funds tend to cost more money than ETFs.
How To Buy an ETF
The first thing you need to do is set up a brokerage account. You can also open a full-service account and get access to financial advisors who can give you advice and buy the ETFs for you. However, if you want to save on fees, you can go for an online discount brokerage account and buy them by yourself. The next step would be to determine the type to invest in. This step needs a little bit of research in order for you to become familiar with all the available options. For example, there are ETFs that follow a certain index and others that track entire market sectors such as energy or tech. The best option would be to invest in low-cost ETFs such as the ones tracking S&P 500. There are many tools on discount brokerage accounts that can help you screen the market and research different types.
After you decide on the type of ETF you want to buy, you need to know how much money you can actually invest. There are many strategies for financing ETFs. For example, you can make a large payment to avoid commissions and fees that are normally associated with trading it. You can also try dollar-cost averaging and split up the payments to pay on a weekly or monthly basis for your investment. Finally, you will need to fund your account by depositing money in it so that you can start investing and making purchases. As soon as the money reaches your account, you’ll be ready to start investing in ETFs.
ETFs are great for beginner investors as they offer a large number of options and benefits that are not offered by many others in the same category. However, you can’t start investing without learning the basics and know what and what not to do. This article will help you wrap your mind around exchange-traded funds in order for you to know what to expect when you start investing by yourself.