ETFs is a money term you need to understand. Here’s what it means.

What is an ETF?

An exchange-traded fund (ETF) offers investors a way to pool their money in a fund that invests in stocks, bonds and other assets and then receive a stake in that pool.

Deeper definition

These kinds of investments have been used since 1993, and they became more and more popular in the early 2000s.

An ETF is a combination of various investment assets. It works much like a mutual fund. ETFs and mutual funds are baskets of securities that are chosen and maintained according to a particular management strategy.

However, ETF shares are bought and sold on the open stock market, which allows for more agility because individual stockholders can monitor and respond to the market in almost real time.

Companies plan out the exchange-traded fund by deciding what assets will be bought and establishing details such as fees and the number of shares to be created. The Securities and Exchange Commission then reviews and approves the plan. At that stage, authorized participants can start to buy shares in the ETF.

ETF example

There are more than 700 ETFs available in the marketplace today. Many ETFs are based on a market index such as the S&P 500 Composite Stock Price Index.

There are many reasons why an ETF might be a better investment option compared to mutual funds and individual stocks. The main benefit of ETFs over other investment vehicles is that they allow investors to buy a variety of assets at once.

ETFs offer more flexibility than mutual funds, as they can be traded on the stock market rather than being held until after the stock exchange closes.

Investors can trade ETF shares quickly during the trading day, based on the market value. Investors can also benefit from different investment strategies with ETFs, such as purchasing them on the margin, selling them short, and buying very small numbers of shares.

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