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Posted on 27 July 2012.
Exchange Traded Funds (ETFs) are not understood well by the general investing public. This ETFs for Dummies tutorial takes the mystery out of ETFs and explains the major risks and rewards associated with investing in ETFs. ETFs for Dummies provides a foundation for understanding ETF investing that can be utilized to further research specific ETFs for investment purposes.
The general ETFs for Dummies definition of ETFs are funds that hold a variety of assets that trade in the same manner as stocks, with constant price updates during the day that generally track the value of the underlying assets. ETFs are either broadly based or targeted to a specific investment type or market segment. A trader or investor can essentially trade and invest in ETFs in the same way as they can stocks, using limit orders, stop limit orders (to protect one’s downside risk), and short sale order (to play ETFs on the short side, when one expects them to fall in price).
ETFs can include a wide variety of different types of assets from stocks to bonds to commodity futures to hard commodity assets. ETFs can also be targeted in many different ways to invest in regions, countries, commodity types, stock sectors, amongst many others. ETFs can also be broad based and track stock market indexes that include stocks of companies in many different types of businesses.
An ETFs For Dummies tutorial wouldn’t be complete unless it covers the main risks associated with trading and investing in ETFs to help traders and investors to avoid the pitfalls associated with buying ETFs. The following are the main ETF risks:
Of course, there are also rewards associated with investing in ETFs, and ETFs For Dummies is going to spell them out. ETFs can be particularly rewarding if used to invest in a stock market index, as their fees are considerably less than mutual funds, which increases the potential long term investment gains. ETFs can also be particularly useful when an investor is trying to make a targeted investment, as there are ETFs for a wide variety of investment scenarios. Leveraged ETFs can be useful to traders trying to capitalize and make the most money possible from an anticipated move in a market segment.
ETFs For Dummies is just a primer to get started with ETF investing. Additional resources should be consulted before making ETF investments.
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