A relatively new way of trading in the stock market is through ETFs or Exchange Traded Funds.
ETFs are not the most straight forward trading or investment mechanism, and they do take some time to understand, but the benefits of trading exchange traded funds are far greater in many respects than trading regular stocks and mutual funds.
Exchange traded funds are investment funds that are traded in stock exchanges just like stocks are. But as stocks represent a single share of ownership in a publicly traded company, an ETF represents a share of a basket of stocks of various companies, or commodities and bonds.
ETFs used to be mostly index fund driven up till 2008, when the Securities and Exchange Commission (SEC) decided to allow the active management of ETFs. Sound like mutual funds? They are, except exchange traded funds reflect values very close to the true net asset value of its underlying securities throughout the day rather than settling at a given value during the end of the day like mutual funds do.
The simplest way I can explain an ETF is that they are mutual funds that can be traded throughout the day like stocks. More technically speaking, an ETF is a pool of securities that are available for sale to investors that can be bought and sold throughout the day just like stocks.
Here are just a handful of benefits trading ETFs.
This is not a comprehensive list by any means. ETFs take some time to understand, and can be an investment worthwhile your time given its benefits. It is one way to keep more of your hard earned money and maximize your return on investment over the long haul.
One downside that I can think of is because exchange traded funds are low to no commission and they can be traded over the counter daily just like stocks, many are day trading these easily multiple times a day. It is easy to get carried away with this activity and I know that I don’t need to remind you of where most day traders end up?
I personally do not day trade anymore because among other reasons, I don’t understand how to profit from the short term nature of ETF investing, nor do I have the time and appetite for the headaches that accompany day trading.
Just as I do with mutual funds, I buy and hold my ETFs over a long term. And because there is no commission involved in the ETFs I am invested in, I can afford to buy a small amount each month, therefore dollar cost averaging my ETF investment portfolio without incurring any fees.
This benefits me both in the short and long term. Doing this over time can expedite my portfolio’s growth by 12 or more years compared to someone who invests the same amount over the same time horizon but pays commission on their trades.
Exchange traded funds have become a fairly routine form of trading and investing for many today. That said, I recommend spending some time learning about them in depth before taking the dive.
Have you incorporated ETFs in your investment mix? Why or why not? What do you think about ETFs in general?
Here is Wiki’s definition of exchange traded funds.
Thank you for posting this informative information Sunil.
You are welcome Jade – and welcome to the blog!
Sunil, it’s great that you bring this possibly overlooked money-making instrument to people’s attention.
I trade UK stocks and looked at ETFs as a way to short markets, but I seem to remember that I was put off by a potential lack of liquidity in some of the EFTs i.e. you can easily buy, but you may have a problem finding a buyer when you want to sell. I am talking about ETFs offered via my UK broker Self Trade a few years back. So things may well be very different now.
So I would urge potential investors to confirm that they will be able to easily trade the instrument that they are interested in at the volume that they are interested in with acceptable spreads between buy/sell price and charges before trading.
Andy, thank you for some real helpful insights. I have not encountered such an issue here in the US, in fact quite the opposite in my experience. I can see how that can be a nasty surprise however.
Curious – how did a UK stock trader get into internet marketing coding?
I have traded stocks for many years. I came across Internet marketing when I was working at a job and got very curious, so had to check it out. Don’t you want to make money in many different ways?
Today I turned over 5 figures stock trading, way more than my websites. But I have the addiction for coding and building web sites 🙂
I feel you brother. I was in the same shoes. And yes, I like to diversify my income streams as much as possible. Looking forward to getting to you know you better.
Great delivery. You kept in fairly simple, yet I understand. I still haven’t played with ETFs or any other stocks in quite some while. I banking on the lows of the current real estate market to generate future passive income.
Thank you Romeo – with both stocks and real estate undervalued right now I don’t think you can go wrong with your approach in the long term. I am interested in hearing more about your entrepreneurial ventures, mainly your approach to real estate investing. Flipper or long term holder? Any tips you can share that have worked well for you?
Right now I’m a long term holder. Flipping is too risky at this point for me, especially because I don’t have the capital to do so. I have no tips per se’ but I did write a post recommending how to purchase an investment property: http://romeoclayton.com/2011/07/20/buy-a-home-or-investment-property/
Thanks for sharing. Holding is a great way to build wealth over time. On to reading your post this fine morning.
I also play the real estate market. Now I own a house in Japan which I purchased at the bottom of the market, and the exchange rate between my home currency (UKP) and Japan has changed dramatically in my favour.
wow Japan – I am jealous. You live there or rent it out? If the latter, how do you manage?
I live there 🙂
I was known of ETFs but not all the benefits attached to it.Thanks for educating on the matter.Keep sharing.
Q2 – welcome to the blog