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Are ETFs The Next Big Thing On the Stock Exchange?

01 November, 2019

Exchange Traded Funds (ETFs) is a new way through which investors are accessing the broader market at a much lower cost.

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The very nature of these funds is that they can track any stock market index across the globe.

They can also get instant hold of the price of stock and commodities, making selling and buying more transparent and liquid. This suggests that you can move your money out of the ETFs more easily without feeling shortchanged.

The most notable thing with ETFs is that most stockholders can see how financial investment in the fund can multiply, especially in the long-term. Coupled with lower charges, it's just what many market players need, hence the mushrooming of many ETFs.

 

What Are Exchange Traded Funds(ETFs)?

ETFs are a unique fund which owns a wide range of assets including stocks, treasuries, gold bars, indices among others. The fund consists of borrowed stock, held in trust as shares for shareholders.

The shares are traded on the stock exchange through a brokerage firm. As an investor, you can buy or sell whenever you think the market is favorable. The price of the shares is usually dependent on the supply and demand of an asset.

Since the price is also subject to the underlying value of the investment they hold, sometimes an ETFs price can differ from the net asset value. All the same, ETF shares are structured in such a way that the gap between supply and demand is quite tight in the trading platform. So, consider this fact when trading.

 
Characteristics of Good ETFs

There are several reasons why investors are opting for ETFs. These include:

•    Favorable costs: Most reputable ETFs are associated with lower costs in terms of marketing and distribution. This makes business sense to investors.

•    Versatility: ETFs offer good positions for diversification. For instance, investors have several options in the form of stocks, energy as well as emerging markets.

•    Flexibility: It’s not only easy to acquire the shares, but it's also quite simple to buy and sell them at the prevailing market prices.

•    Taxation: ETFs win big time because of a lower tax associated with the fund. One of the reasons is that there is never a need for EFT management to institute constant buying and selling of shares. Not unless there are changes in a component of an underlying index which an ETF is trying to track.

•    Transparency: The majority of ETFs are, in fact, an open book. The reason is that since they are tracking an index, everything, including the prices, is public knowledge. The prices come in at frequent intervals, throughout any active trading day.

•    Excellent tracking error record: This makes the full and partial replication processes much quicker and more efficient.

•    Provides ease of use: It is probably one of the reasons investors are more interested in ETFs, more than any other investment of recent times. Just like stocks, ETFs can be bought and sold any time of the day, during the active trading hours.

You can also exit the fund any time during trading hours. This flexibility is quite convenient for most people who are not tied down by stringent rules.

Besides, investors no longer need to purchases individual stocks when ETFs are offering a more accessible channel of investment.  It becomes an easier investment option for anyone regardless of financial weight.

 

Conclusion

 

Exchange traded funds are a modern innovation, enabling investors to access markets and assets that were previously unreachable.

For investors who plan to trade in the long-term, an investment idea coming at just the right time. It’s quite easy to acquire shares, and if you are in it for the long haul, you can benefit from lower charges too.

ETFs allow market exposure and diversification for their investors. It remains a fertile ground where you can choose various market options such as indices, commodities, or even stocks depending on your strategies.

Other than that, it's a smooth journey where you can buy and sell your shares any time of day, with prices going at the current market price of an asset.


 
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