Everybody knows about stocks, and most people have heard of mutual funds. But not as many people are familiar with ETFs. That is unfortunate, because the largest ETFs trade almost $75 billion on average every single day!
ETFs are definitely a big part of the investment game. Every investor should at least consider them as part of their own investment strategy.
So what exactly are ETFs? And how do they compare to mutual funds and stocks? Read on to learn all about these financial tools and how you can benefit from investing in them!
Stocks are just fractional ownership in a company. Just imagine that you own a little piece of every company that you buy stock from.
Since you own a little piece of the company, of course you will get some part of the profits of the company. And as a partial owner, of course you have some say in how the business is run.
Dividends are the way that you get part of the company’s profit. When they have a good year, they share their profits with all of their stockholders.
Of course, not every company offers dividends. Instead, they might reinvest their profits to grow their business even bigger. However, the value of stock is ultimately determined by the potential dividends that they may eventually share.
As far as decision-making goes, stockholders get a vote. Unlike in a democracy, not all stockholders get an equal vote. Instead, they get as much voting power as corresponds to how much stock they own. They vote on decisions like who will run the company and who will sit on the board of directors.
Mutual funds are powerful investment options that are not necessarily open to everybody. They usually come with higher minimum investment requirements.
On the cheaper end, this minimum investment might be around $250. But more commonly, investing in mutual funds will require that you spend at least a few thousand dollars.
So why do people accept these kinds of requirements to invest in mutual funds? What makes mutual funds so attractive?
Mutual funds are managed by specialized management teams. They buy and sell a long list of stocks and other financial securities in order to out-compete the market. That expertise and labor comes with a premium.
ETFs are also funds managed by teams. However, they are much more accessible.
Generally, people can buy just a single share in an ETF if they so choose. There might be some transaction fees, but essentially, anybody can get into an investment fund just by buying a single share.
Many people are attracted to ETFs because of the tax benefits. When other funds make money, you have to pay capital gains on them. But when an ETF makes money, you can take your profit in “in-kind redemptions.”
You can use those redemptions to keep investing, but without having to pay taxes on the profit you have earned so far. That is a great way to grow your investments in your future.
Enjoy All of the Benefits of Investing in an ETF
We hope that you were able to learn something helpful about the differences between mutual funds, general stocks, and ETFs. Making savvy financial decisions starts with familiarizing yourself with the landscape of investment. The world of investment is extremely competitive, and luck and success favor those who are as well prepared as possible.