What Are Etfs? Are Those Stocks? What Do I Do?
You’ve asked yourself those questions before, I’m sure. But the answers aren’t a simple yes or no, in fact the answer is sometimes both. I’m sure that doesn’t actually clear anything up, but let’s take a walk around the idea of ETFs to get a better understanding.
What are ETFs? Are those stocks? Free charts and quotes are available in a variety of places on the internet and the usual stock trading tools generally apply so it’s easy to expect that since they behave a bit like stocks, that they must be stocks.
ETFs are in fact exchange-traded funds. They’re traded on markets like stocks, but aren’t really stocks themselves. They’re more like a mix of mutual funds and a closed-end fund, which in and of themselves aren’t really considered to be “exchange traded.”
Mutual funds are bought and sold at the end of the day, based on the results of the day’s trading. And closed-end funds are bought and sold throughout the day at prices that don’t reflect the actual value of the fund’s assets. A closed-end fund isn’t an exchange traded fund, though they’re funds that are traded on an exchange.
What Are Etfs? Are Those Stocks? They can be sold like stocks, because they can be bought and sold throughout the trading day. However, they are actually funds that are made up of securities and are structured more like mutual funds.
Unlike stocks, though, exchange traded funds can’t be bought by the share by financial institutions. Rather they’re bought in blocks of tens of thousands to hundreds of thousands of shares or “creation units.” This bulk buying exists to limit variation between the actual value of the assets and the purchase price of the creation units.
So, what are ETFs? Are those stocks? They’re for easy diversification of investments, maintaining low expense ratios and tax efficiency, while still keeping the basic features of stocks. You can still short sell them, put limit orders on them, or sell options on them. You can, in essence, treat them much like stock.
Finance can be confusing. It reading this has done nothing to clear it up for you; my advice would be not to invest in Efts yet. Make sure you understand the entire process of specialized investing prior to sinking your cash into it. It is always best to invest in something that you are comfortable and knowledgeable about.
