Exchange traded funds: A beginner's basics

An exchange traded fund or ETF is type of investment that is traded on the market actively like stocks. ETFs have benefits similar to stocks and index funds. Because an ETF trades actively throughout the day like stocks, its price changes constantly, as investors buy and sell shares of the ETF. Like index mutual funds, the expense ratio of an ETF is typically low. In fact, ETFs generally have lower expense ratios than passively managed mutual funds. There are many different types of ETFs, including, actively managed ETFs, bond ETFs, market ETFs, among others. 



h5>Why investors buy exchange traded funds

Investors invest in exchange traded funds for various reasons. They invest in order to create wealth, achieve financial stability and independence, plan for retirement, vacation, or education. In addition, ETF investments offer investors more diversification and less risk, compared to stocks. 

How to purchase exchange traded funds

You can buy exchange traded funds from a broker for the fund (Fidelity, E-trade, TD Ameritrade, etc.) or the fund itself. Investors buy ETFs at the fund's net asset value (NAV). The NAV is nothing more than the amount of money you need to buy one share of the fund. Although ETFs are less risky investments compared to stocks, you should always read the fund's prospectus, a document that outlines the fund's investment strategy, fees, risks, among other things. 



Benefits and risks of exchange traded funds

As an investor, owning ETFs comes with risks and benefits. If the ETF's price goes down, you will lose money and vice versa. There is no certainty that companies whose stocks the ETF holds will prosper or do well. An ETF's NAV is dependent upon the basket of securities (stocks, bonds, cash, etc) it holds. Many factors affect an ETF's share price, including but not limited to quarterly earning reports of individual companies, regulatory, political, economic and other events. 

How you make money from exchange traded funds

First, you make money when the ETF's price goes up or through capital gains. You also make money by earning dividends. Dividends are usually paid to shareholders quarterly. Not all companies pay dividends. Check out a nice comparison between stocks, ETFs and index funds.