The Difference Between ETFs and Mutual Funds Investing For Beginners

Post on: 6 Август, 2015 No Comment

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When I began investing, one of the things I struggled with was where to start. My goal was to accumulate assets. After reading a lot, I determined that the best way for me to start accumulating assets was to invest in the market (this seemed more appealing to me than getting into real estate). Before I began investing, I did some research and talked with friends and family who are experienced investors. I highly recommend learning before doing in this case. And for me, I started by learning basic definitions, the different types of markets, and a variety of investing strategies.

Since investing hasn’t become a serious hobby for me (and it wont until Im out of student loan debt), I stick to investing in funds. If youre not sure what I mean by investing in funds, Ive included a very basic investing introduction to get you up to speed.

Introduction – Stocks, Bonds, Diversification, and Funds Defined

Stocks - When you buy a stock, you are buying a share of the company (you are now a shareholder). When you buy a stock you own one share of one company. So, if you buy one share of Apple stock, you are now part owner of Apple. (That said, you are a very very small owner!) If Apple goes under, all of your stock goes down and you lose money. (High risk; high return.)

Bonds – When you buy a bond, you are loaning money to an entity (e.g. companies or the government) for a fixed amount of time, at which point, you’ll be paid back with interest (low risk; low return).

Diversification – An investment term that describes owning a variety of securities, such as a combination of stocks, bonds, commodities, and funds. Diversification is a tool used to minimize risk. Because owning shares of one company can may be risky (if the company fails, you lose money), most people diversify their portfolios. Experts, like Marc Cuban, may not diversify (he’s spoken about how stupid it is ), but for the average person, diversification is common. If one of your investments fail, you’re still in good shape.

Funds - When you buy a fund (such as an ETF, mutual fund, or index fund), you are buying a group of securities, such as stocks, bonds, and other commodities. This means you buy one fund that is already diversified in itself. A fund can be broad, where it follows an entire market (S&P 500 for example), or it can be narrow, where it follows only in a particular area (such as technology).

Mutual Funds vs. Exchange Traded Funds

If you want to invest in individual stocks and take the time to make investing a legitimate hobby of yours, you may not be interested in investing in funds. However, for people who are not making investing in stocks a hobby, investing in diversified funds is an attractive alternative. Youre able to buy the funds without having to constantly monitor them. This is a great way to invest without making investing a huge time commitment.

Mutual funds and exchange traded funds (ETFs) are two very popular types of funds that people invest in to stay diversified. Mutual funds and ETFs are similar because they are both funds that have groups of securities (100 to 3,000) in them, making the funds diversified. But which is better? It depends. Personally, I invest in ETFs through TradeKing (where the trades are only $4.95), but I’ll let you make your own decision on which is best for you. Here are the main characteristics and differences between mutual funds and ETFs.

Mutual Funds

A mutual fund is a group of investments, including stocks, bonds, and other securities.
Mutual funds are managed by a professional advisor at the cost of a management fee.
The average management fee is between 0.5% and 1.0% of all funds.
The advisor actively manages the mutual fund in an attempt to beat the market.
While you can place an order for a mutual fund during the day, the actual trade takes place after the markets close.
Mutual funds require a minimal investment often in the $1,000-$5,000.