It is not necessary to have a large fortune if you want to invest. One can multiply funds with any starting amount of money. What to invest in to preserve and increase your capital? Let us discuss some issues on how to invest in ETF, what it is, and the pros and cons of ETFs..
ETF: Definition and Basic Explanation
Almost everyone is familiar with shares on the stock exchange. However, the term Exchange Traded Funds or ETF is widely used in trading. Why does it appear? Some funds buy shares of companies based on a certain attribute, such as an index. In turn, you buy an ETF share of such a fund, becoming a partial owner of all securities purchased by it.
Let us consider the S&P 500 index to understand better what we are talking about.
The S&P 500 is a stock index that includes 505 US-listed companies with the largest capitalization. It includes Apple, Google, Facebook, Amazon, Tesla, and many other global stars. For the US economy, this index is a litmus test. Over the last year, the total value of shares of all companies in the S&P 500 has increased by 35%.
For example, you do not want to risk buying shares of specific companies, but you want to grow with the market using the financial graphs. Then, you have two options:
1. Buy shares of 505 companies from the S&P 500. To buy one share of each company, you will have to spend more than $100,000.
2. Buy S&P 500 ETFs considering that the cost of one ETF share is $399. One ETF share will give you 35% over the past 12 months because the fund purchases real shares of companies with S&P 500 in equal shares with the received funds.
Types of ETFs
There are several options with different coverage, namely:
· Market that tracks a specific index.
· Bonded that gives access to different types of bonds.
· For special industry.
· Tracking the prices of commodities.
· ETFs for different markets in countries or regions all over the world.
· Reverse that calculate the profit from the fall of the underlying market or index.
· Those that must be managed actively instead of tracking only.
How Safe Is It to Invest in ETFs?
Theoretically, an ETF fund could go bankrupt if its assets fall to zero. However, they are invested in a fairly large number of stocks and bonds, so, in practice, this scenario is unlikely. Of course, the ETF fund may close at the request of its founders due to low demand.
However, none of these cases provides that you will lose your funds due to their liquidation. You can remain without a part of investments only because of a correction or collapse in the market.
Anyway, before you start investing, close all debts and also collect some funds for at least six months ahead. Always keep in mind that what you buy or sell must be entirely within your area of responsibility.