ETFs are an easy way to start investing. Such Exchange-traded funds are fairly easy to understand and without much effort or hassle, can generate impressive returns. Here’s what stock trading beginners need to know about ETFs, how they work, and how to buy them. It can be intimidating jumping headfirst into the market of stock. Where to start? The thought of choosing all of your investments can be sufficient to make you nervous if you’re an independent investor. But instead of only focusing on single stocks, it might be worth getting into ETFs.
What are ETFs?
ETFs, lets investors buy several bonds or stocks at once. Investors buy ETF shares and according to certain objectives, the money is used to invest. For instance, buying a 500 S&P ETF, in that index; your money will be invested in 500 companies.
Understand the basics of ETFs
An important feature of many Exchange-Traded Funds is that they are mostly managed passively. That is, instead of portfolio managers making the most of their knowledge and beliefs when choosing certain stocks to sell and buy, they try to track a particular index’s performance. ETFs can do this by simply tracking a specific index and also holding a group of stocks from the same index. Or track a company (such as biotech) by simply investing in shares of various companies in that industry. Before we go any further, there are a few things you should be aware of before buying your first ETF.
Active vs Passive ETFs: Basically there are 2 ETFs types. Active ETFs use portfolio managers to invest your money. Passive ETFs (also known as index funds) simply track a stock index like the S&P 500. It is worth noting that Passive ETFs want to match the performance of an index while Active ETFs intend to outperform the performance of an index.
Expense Ratio: A fee known as the expense ratio is charged by ETFs. View your expense ratio as a percentage per year. For example, for every $1,000 you invest, you pay $10 in fees with a 1% expense ratio. A lower expense ratio will save you money with all things being equal.
DRIPs and Dividends: Most exchange-traded funds pay dividends. You can automatically reinvest them through a dividend reinvestment plan, or DRIP or pay dividends on your ETF in cash.
Let your ETF do the hard work for you
If you have 1000 euros to spend and you want to multiply it by a few thousand euros. In the market of stocks this is possible in the short, medium or long term. We recommend buying ETFs in the same sector (for example, Internet technology) that can contain around 100 stocks, to minimize risk.
Diversification is often cited as one of the best advantages of ETFs investing. It is best to buy ETFs on an exchange. But there are about 100 stocks in the ETF here, so it reduces your risk because it’s a joint venture. Diversification is actually a strategy for managing risk that helps to reduce the impact of the volatility of the market and makes up balance in portfolio for you, by spreading investments across unrelated or different asset sectors and classes.
Conclusion
Exchange-Traded Funds can be a great source of portfolio diversification as a result of the fact that they contain the stocks (or variety of assets) of not just one company. New investors tend to have a bad habit of reviewing their portfolio too often and reacting emotionally and spontaneously to big market moves. In fact, the average fund investor has significantly underperformed the market over time, and the main reason is over-trading. So if you’re buying shares of some big ETFs, it’s best to leave them alone and let them provide excellent investment growth over the long term.
