Imagine this scenario: you’ve decided to invest in stock, maybe after an inheritance or other similarly sudden financial acquisition. You enter the office of a financial advisor who begins throwing terms around at you like ETFs, Mutual Funds, and everything in between that you cannot even begin to parse. Unfortunately, this kind of jargon catapult occurs on a daily basis in certain fields, finance included. But, one of the most important concepts to grasp in a meeting is the difference between various types of investments, ETFs and mutual funds included.
Don’t worry about individual investment, with these powerful tools you can create a diverse stock portfolio that nets financial gains consistently without you lifting a single finger. But, to take advantage of these incredible options you need to know what they are. So, let’s do a deep dive into the basics of ETFs, and you may be surprised where we end up.
Mutual Funds
Mutual funds are the first step to understanding properly an ETF and what it does. This may seem strange given the two totally different sets of terminology, but they are intrinsically connected. Mutual funds are effective personal accounts that diversify stocks by pooling with a bunch of other investors. Most of the time, mutual fund managers shift around the funds of the investment in order to maximize gains, and they are usually supported by market researchers and other professionals who make this work.
Mutual funds are a great first investment since they take away much of the risk both by diversifying with a manager and by pooling resources with others. They are safe, for the most part, though nothing involving stocks truly is completely safe. These funds are compiled into a portfolio and that’s that, the stocks accruing value in that portfolio just like everything else in the market
A Layer of Exchange
Now, take mutual funds, which are already a fairly safe investment, and make them tradable on the market as well. This adds another layer of abstraction and with that, there are many different types, rules, and ways to lose. So, a mutual fund isn’t tradable normally but an ETF is. Exchange-Traded Funds now is a term that might make some sense, since effectively you have a stock portfolio (fund with a bunch of stakes of ownership) combined into a fund that can then be traded freely just like any other stock.
If your head is swimming now with the implications of that, that’s good, because there are many types of ETFs that mirror the different types of mutual funds. It may seem like this is just a circular track of investment, but ETFs have limits, such as their activity. ETFs are (normally) just set to invest in a certain market but not be actively managed. Certain rules like that make ETFs easier to manage, but let’s talk about a few different types first.
Goals in Sight
An ETF that is actively managed is rarer than you might think, but if they do pop up chances are that they have a clear objective for their fund. This is necessary to maintain trust with investors and also just helpful for everyone involved. Many ETFs seek to get to certain amounts measured by the inverse multiple of the original value, but actively managed varieties have a specific objective normally that they place front and center for the world to see.
It should be noted now that ETFs are much like the companies that people invest in normally. And, for the most part, in this case, this is true and they are most of the time required to register as companies. Think of them, then, as a conglomerate of different shares in a specific range or field of business that you can then buy like any other company. Rather than buying a share in a mining company, instead, you can purchase a share in a huge array of mining companies.
ETF Oddities
There are many strange things required by law that sets ETFs apart from “normal” mutual funds. For instance, since they can be actively traded they aren’t restricted to changes at the end of a trading day. This difference is minor, but in the world of stock trading, even seconds at a particular moment can mean a major problem or some huge profit.
An example ETF revolving around gold, for instance, can invest in precious metals, the companies that produce them, mining, etc. but may never stop changing price during a particular day. Gold is a great example of something where diversifying assets within a specific industry is an intriguing proposition, so you can find more information about that here: https://investingingold.com/monetary-gold-review/. In general, each market segment has its quirks that make active or passive managing more or less preferable, and gold is the best at being this kind of industry.
Managing ETF companies does take a certain amount of income, so a lot of these funds have a commission paid to them on a change with the account. This commission lets them continue to trade the fund as before, and though this is annoying for many, it is certainly a valid cost associated with a company and this is no different.
Fund Conclusions
One of the best ways to quickly make money in stock investment is to buy low and sell high, and this is certainly no different. Though ETFs are usually more stable than individual stocks, they can cost more and commissions can complicate the necessity to purchase them. Don’t go into any transaction involving any amount of money lightly, but specifically with stocks and mutual funds, it’s worth doing plenty of research.
Be safe with your money above all, though if you go through the usual channels the chances of being directly scammed are low. All you need to worry about at that point is not being scammed by the market, perhaps a necessity of doing business in the age of stock trading and capital. Stay smart out there, and you will do well.