When you buy stock, you’re putting money into a company or fund with the hopes of making more money. Yet the upfront cost of some stocks can be quite high, especially if you want to buy more than one share.
Right now, if you wanted to buy single shares of Apple ($AAPL), Google ($GOOG), and Amazon ($AMZN), you would have to spend over $1700 for just three shares of stock. While some people could afford this and wouldn’t bat an eye at this transaction, newer investors are reluctant to put in as much money.
Luckily, exchange-traded funds solve this costly problem with an easy solution. Instead of purchasing expensive shares of stock, exchange-traded funds (or ETFs) let you invest in hundreds of companies at a time for one price. So if you want to buy Amazon, Google, and Apple but only have a few hundred dollars, now you can.
ETFs are like giant bundles of stock created by investment groups.
They can be made up of shares from several companies, or shares from hundreds of companies.
ETFs are created and managed by investment groups.
Leading investment groups like Vanguard and Blackrock buy millions of shares from select companies. When you buy a share (or shares) of their ETF, you indirectly own percentages of their shares proportionate to your investment. While these high-profile investment groups manage the ETFs, anyone can buy them.
ETFs costs are reasonable, compared to high-priced stock.
Right now, the three most popular ETFs cost between $180 and $214 per share. Compare that to, say, the $785-per-share cost of Google.
ETFs follow a market or market index.
For instance, Blackrock’s $SPY only contains shares of companies listed on the S&P 500, like Google, Apple, and Amazon. If a company falls off the S&P 500 and another company takes its place, Blackrock sells the shares of the old company and buys shares of the new company. If the S&P 500 goes down, so does SPY, and vice versa. If you invest in SPY, you will essentially own — via the ETF — small percentages of Google, Amazon, Apple, and 497 other companies.
You can buy ETFs that mimic indexes (like SPY) or purchase commodities like gold and oil.
If the value of gold increases, a gold ETF’s value increases. There are even ETFs that bet against the gold market, so when the value of gold decreases, those ETFs increases.
Like regular (common) stock, you can buy and sell ETFs through a brokerage.
ETFs are liquid, meaning if you wanted to buy them now and sell them in an hour, you could (but shouldn’t). You can also earn dividends on ETFs, just like regular stock.
ETFs come with minimal fees.
Mutual funds take at least 1% from their investors’ portfolio every quarter. ETFs normally take a fraction of a percent from their investors’ portfolios, since ETFs are a lot easier to manage than mutual funds.
ETFs are a great and cost-effective way to invest in the long-term.
Since the market historically increases in value, an ETF following a market index will generally increase in value over time. They can decrease in value if the market decreases in value, but holding on to them during a recession or a downturn would see them increase in value when the market picks back up.
Many investors — even stock brokers — put a large chunk of their money in ETFs because they’re not as risk-prone as investing in a single company. Plus, once you buy shares of an ETF, you could always put more money into it in the future and still see returns when you finally cash out.
Simply put, if you want an easy way to invest and don’t want to spend a fortune on a big risk, ETFs are the way to go.
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