Chapter One: The New Investor
Once you graduate college and/or land your first full-time job, you may want to start putting some money aside for retirement. If you’re like me, you want to start building your nest-egg as soon as humanly possible to allow for compound interest to work in your favor over the years. Enter: Exchange Traded Funds, or simply “ETFs”. Now, if you have no experience in the stock market, reading financial statements, or haven’t a clue what Fibonacci Analysis is — don’t fret. Understanding most investment vehicles (including ETFs) and using them are simple and nothing to have an anxiety attack over.
The Mutual Fund
To prime for the ETF explanation, you must first have a basic understanding of a mutual fund. A mutual fund is a “fund” of money from hundreds or thousands of everyday investors that is managed by a professional. For example, if you wanted to invest in the stock market, you could take your money and buy a bunch of individual stocks. This would take a hefty sum of money, more money than most college grads have to spend, but it can be done. However, a mutual fund allows that same college grad to use a fraction of the capital and invest in a similarly diversified portfolio. To put it in perspective, ABC Mutual Fund could invest in hundreds of companies; it has a diverse portfolio. John Doe would then use his investing money and buy shares of ABC Mutual Fund, rather than purchase shares of individual companies. John Doe now has a diversified portfolio (for all intents and purposes) with a fraction of the starting capital that would be needed to purchase individual stocks with the same diversification.
So, What’s an ETF?
Simple enough, right? Now, and ETF is very similar to a mutual fund. The main difference being that an ETF trades throughout the day like a stock, so you can buy and/or sell during regular trading hours. A mutual fund is only priced at the end of the trading day, so they are not as liquid as an ETF. ETFs are also known for their rock-bottom operating costs, so you pay less to the professional money manager(s) to oversee the fund.
Many ETFs often track a stock market index, such as the S&P500 or the Dow Jones Industrial Average. This allows for the investor to reap the rewards of the overall market, rather than just individual companies. Investing in an “index fund ETF” is a fairly safe and reliable way to make gains throughout the years without taking on an abundance of risk. Most index funds out-perform professionally managed mutual funds, anyway.
If you have any questions or concerns about getting started in the stock market or investing in ETFs/mutual funds, feel free to send me a message through the Inquiry tab at the top of the page.