If you are interested in personal finance, you might have encounter people mentionning ETF as a good investment.
But what is it exactly?
In this article I’m going to explain what is an ETF and why it may be a good way to invest in the stock markets at lower cost.
What is an ETF?
ETF is an abbreviation of Exchange Traded Fund.
An exchange traded fund (ETF) is a fund that replicates an index of a sector, commodity or other asset and can be bought and sold in exchange like an ordinary share. In other words, an ETF is a basket of various assets that you can buy and sell through a regular broker or exchange
For example, an ETFs can replicates the S&P 500 index and to do so it will have a personalised repartition of the stocks that compose that same index (Apple, Google, etc …).
ETFs can be traded on all major exchanges such as the New York Stock Exchange, the NASDAQ, etc …
Like individual stocks, ETF stocks are traded throughout the day, and prices vary according to supply and demand.
ETF: is it a good investment?
First, it is mandatory to determine whether exchange traded funds (ETFs) make sense in your portfolio.
In order to do so, it is important to understand their advantages and disadvantages relative to other common forms of investment.
ETFs are very good way to start investing in the stock market for beginners.
Indeed, due to their nature, you will be able to invest with a small amount of money on a whole index. Instead of having to analyse, pick and buy various separate stocks.
Moreover, most investment funds require a minimum investment, but investors can buy as low as only one share of an ETF. So the barriers to entry are very low.
They’re also less taxed than investment funds since most of the buying and selling happens on an exchange, and the ETF sponsor doesn’t have to cash in shares every time an investor wants to sell or issue new shares.
Last but not least, if a particular company has had a difficult month, the relatively stable performance of other stocks in the ETF could dampen the impact on your overall portfolio.
Thus, buying ETFs is generally considered a smart move to make as a beginner as it’s relatively a safe bet and they have a strong growth potential in the long term.