What is ETF?
The exchange-traded fund a.k.a ETF for short is a collection of many stocks or bonds into a single fund. ETFs are similar to mutual funds. The only difference is that instead of putting your money into the fund, you just buy ETFs on exchanges. There is no limit to how much you can start with and more importantly, all investment decisions are made solely by you (the investor).
Traders and investors can buy and sell exchange-traded funds like stocks. That is ETFs are traded on stock exchanges such as Nasdaq, New York Stock Exchange, etc. Investors who traded stocks before will have no problem buying and selling ETFs. Most ETFs are diversified and therefore are less risky compared to individual stocks.
Exchange-traded funds differ from one another and they are designed for different purposes. For example, some ETFs focus on growth whereas others focus on income.
As an investor or a trader, you should know your priorities and do research accordingly. That is if your main priority is to generate income, you would focus on ETFs with high dividend stocks. On the other hand, if growth is your priority, you would focus on ETFs that focus on high growth stocks.
Difference between ETFs and stocks
The following are some of the differences between stocks and ETFs.
- ETFs are less risky compared to regular stock: Individual stocks are more volatile and are sensitive to market news and economic changes. Since ETFs are made of hundreds or more stocks, their volatility is low compared to individual stocks. It is not likely that all stocks in an ETF will experience excessive sell-offs at the same time under normal conditions. For this reason, ETFs are less risky compared to stocks.
- It is easy to choose an ETF than an individual stock: It can sometimes be complicated to choose one stock. This is because it takes a lot of time and research to select an individual stock out of thousands of stocks. For the ETF, however, the hard job is done for you. You can still verify individual stocks in each ETF.
- Stocks can sometimes yield more returns than ETFs: Individual stocks are more volatile compared to ETFs and they respond greatly to news and economic conditions. For example, a share price can double, triple, or cut in half in a matter of days due to news. Investors should know that volatility comes with risks.
- ETFs are less volatile
The difference between ETFs and mutual funds
Mutual funds collect money from many investors and invest the money into different investment securities. This means that these funds are professionally managed to the highest standard possible. Instead of buying a mutual fund, investors put their money in the fund and the fund invests the money.
An ETF, on the other hand, is made of hundreds or more stocks. ETFs do not collect money from investors. Instead, they are publicly traded on stock exchanges like normal stocks. That is you can buy and sell an ETF as you wish. This makes it easy and cheaper for institutional investors to buy and sell trade exchange-traded funds. There is no minimum amount required to trade an ETF. As long as you can afford a share, you should be fine.
Investors make their own decisions when it comes to buying and selling exchange-traded funds. These decisions can be made anytime. In addition, investors are able to liquidate their shares in real-time as long as markets are open.
