What ETFs are and what you should know

What ETFs are and what you should know

An exchange traded fund (ETF) can be a great guide to getting you into the stock market. It itself is a security that bases its price on an index, usually. This means it follows the average price on a whole range of underlying assets, like stocks. In this article, we will take a brief look at them.

A trader can get a lot of use out of ETFs. One can invest directly into it and make considerable profits. This is recommendable as a start for beginners. For example, the SPY ETF follows the S&P 500 index. This index tracks the performance of the top 500 companies in the US. This means investing in SPY will likely give you profits. This is because you are mostly following economic growth. Another thing you can do is investigate markets through ETFs. On the overview then, an ETF can tell you how well an industry is performing. Within them, you can find information on plenty of companies worth investing in. From there on, you can get the basic idea.

ETFs do not have to be about stocks though. They can be about bonds, commodities, etc. Generally any asset or security you can think of.

There is also the rather interesting inverse ETFs. They short (bet against) stocks. Therefore, if an industry is doing poorly, these ETFs can still offer a way to profit. However, as a small note, these are not technically ETFs. Rather they are exchange traded notes (ETNs). This is a bond that people can trade rather similarly to your run-of-the-mill stock.

Technically speaking, though, ETFs, for the most part, are actually a type of fund. Lots of people pool money into one place. Then, the person controlling the funds will themselves be investing in the underlying stocks. They will give the investors their profits once they pool out. This is unlike most funds, where the manager has far more control. There, you cannot get out quite so easily.

 

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