Investing Basics (ETFs)
When people think of the stock market, they often relate to individual stock picking, which is the investment into the performance of single businesses, like Ford, Goldman Sachs, Microsoft etc. Individual stock picking is quite risky and does require some financial acumen. This is because every company performs differently and groups of companies in different sectors perform differently. Additionally on a more macro level, markets in different regions perform differently, such as the US market compared to the European market or Emerging markets. This is just the tip of the iceberg so as you can see, the stock market can be quite a daunting place to put your hard-earned money.
Fortunately for us investors, there is an investing instrument that decreases the risk of the stock market while also capturing the upside of gains in the market. This magical instrument is called an exchange-traded fund, more commonly known as an ETF. ETFs typically track a wide range of stocks, which can be an index like the S&P 500 or a specific region like the European market. There are tons of ETFs out there, depending on your preference. You can invest in ETFs that track the whole stock market itself, or ETFs that are solely comprised of energy stocks. The important thing to remember is that ETFs are usually well diversified in their respective category. For example, a healthcare ETF will be composed of many diversified stocks in the healthcare indusry. The reason ETFs are so well diversified is because money managers like Vanguard and Fidelity put these ETFs together, and they charge a very minimal management fee. As a reference, Vanguard charges around a 0.1% fee for its ETFs, whereas mutual funds charge around 1.5%. You are getting the benefit of a mutual fund at a much lower cost!
ETFs trade just like individual stocks. When you purchase an ETF, you purchase one share of the ETF. The difference is that the ETF is composed of many, many stocks so you are not exposing yourself to individual stock picking. To invest in ETFs, simply sign up for an account at a brokerage firm. Some brokerage firms include AmeriTrade, ETrade, Scottrade, TradeKing and iShares - there isn't much difference aside from a $5 - $15 fee charged per transaction and resource tools. I personally use Scottrade because of a relatively cheap $7 fee and it provides great resources.
A good way to start with ETFs is to just track the broad stock market, or regions. For example, buy some ETFs that track the S&P500, or ETFs that track the whole stock market, or ETFs that track emerging markets and ETFs that track the European market. If you want to be risk adverse, put more of your money into broad stock market ETFs or bond ETFs (bonds are generally safer investments than stocks). If you feel more risky, put more money into emerging markets or pacific markets. If you feel like you know an industry/sector well or feel like an industry is going to outperform, put money into that industry ETF. I would advise investing a good amount (50% to 70% of the total amount you want to invest) into the broader market to start off, because its easier to begin on the safe side. As you gain more knowledge in the stock market, start taking riskier bets.
In my belief, as well as many of the top analysts on Wall Street, the markets are on an upswing after the huge recession we faced in the past year. The Nasdaq has been up almost everday for the past 2-3 weeks and the S&P 500 finally went over 1,000 for the first time since November of last year. U.S. stocks are at nine-month highs and are projected to increase even more. Hopefully, the trend continues so we can all be more "in the money."