Step-by-Step Guide on How to Invest in ETFs
If you’re a novice in the stock exchange and trading world, you’ll probably start by investing in ETFs. They are low-risk, cheap, and straightforward. Before we teach you how to invest in ETFs, let’s demystify these securities and how they work.
ETF stands for exchange-traded funds. Unlike trading stocks or other financial assets, ETFs can cover a large number of markets and financial instruments and allow you to invest in multiple securities – stocks, bonds, or commodities – all at once.
To understand ETFs better, let’s first explain what a fund is. A fund is an investment instrument designed for a small investor, which issues fund units for the public to invest in. A fund share represents a part of the total capital of the fund, i.e., a certain number of its units.
ETF investing works sort of like this: Imagine your coworkers planning to buy a gift for your colleague’s birthday. Ten of you have agreed to chip in with $20. With a total sum of $200, you can now afford to buy a nice watch.
In fund terms, the fund's capital was raised to $200, the share of each colleague is $20, and the investment of the fund is the watch.
None of the colleagues would have bought that gift alone, but joint forces have made it possible. Funds that allow small investors to invest in securities they could never buy on their own work in the same way.
Are ETFs and Mutual Funds the Same Thing?
Now that you’re familiar with funds in general and an ETF’s meaning, you might wonder about the difference between ETFs and mutual funds. While both investment options allow you to buy several securities at a time and have an array of stocks and bonds in your basket, the way you buy and sell them is different.
Namely, mutual funds are priced once per day based on their net asset value after the closure of the market. It’s typical to invest a fixed dollar amount and purchase them directly from the issuer or through a brokerage.
On the other hand, here’s how to invest in EFTs: You trade them like a stock on major exchanges. When you choose how many shares you’d like to purchase, you can do so throughout the day, whenever the stock market is open. The prices are not set, but continuously swing due to the constant influx of new shares.
Finally, purchasing ETFs is much cheaper (down to a few dollars per share!), as they require lower minimum investments than mutual funds. You just need to pay for the cost of the ETF and additional fees or commissions, if applicable. Some brokerage companies even offer zero-fee ETF trading.
How to Start Investing in ETFs
Purchasing an ETF is good for beginners due to low prices, the diversity of securities entailed, straightforward trading process, and an assortment of available platforms. Overall, ETFs are a great investment choice and are becoming more prevalent.
Many see them as a substitute for mutual funds, too, thanks to their flexibility. If you want to join in, we’ll now go over all the steps in trading ETFs.
Open an Investment Account
You now know what ETFs are. To invest in them, you’ll need to open an investment account, specifically an online brokerage account with a reliable platform. Setting up an account isn’t hard, and you can do it online; the real problem is finding the right broker.
With a large number of brokers who offer commission-free trading and don’t have account minimums, it’s not easy to make a definitive choice.
We recommend you opt for those who offer an extensive knowledge base and lots of educational features to help you get up and running and learn how to buy an ETF. TD Ameritrade, E*Trade, or Schwab are good candidates, for example.
If you feel insecure about trading on your own, you can go for a full-service account with a financial advisor who can offer real-time assistance. Financial advisors can do the research legwork for you and even purchase ETFs in your place, but you’ll have to pay broker-assisted trading fees.
If you need assistance with trading but aren’t in a position to afford a full-service account with a financial advisor, you can open an account with a robo-advisor. Robo-advisors are AI-powered financial consultants that’ll help you out and streamline your investing using prediction algorithms.
If you don’t know how to invest in ETF funds and are an entry-level investor, a robo-advisor can help you establish a foothold in the finance world before taking things into your own hands.
On the flip side, using robo-advisors limits your independence, as the platform will pick the best investment for you, build and manage your portfolio, and act as an “autopilot” investor.
On the plus side, they usually offer a low annual fee and have a low or zero account minimum. Some of our top picks are Betterment, with a yearly fee of 0.25% on your balance, and M1 Finance, which offers flexible portfolio building.
Find Your First ETFs
We know searching for the best ETFs for beginners isn’t an easy job: There are more than 2,000 ETFs in the US alone. Most brokers offer robust screening tools to help users narrow down the available ETFs. Some of the criteria you should pay attention to are:
- Administrative expenses for passively managed funds
- Commission fees
- Fund volume and popularity
- Top fund holdings
- Similar fund performance history
- Trading prices
When deciding how to invest in an EFT and which ETFs to go for, we recommend opting for passive index funds. Much simpler and cheaper than active ones, passive ETFs simply track a stock index, for example, the S&P 500. On the other hand, active ETFs have a portfolio manager or team making decisions about investing and trading.
If you find all this overwhelming, there are numerous online brokerages for entry-level investors that’ll make things easier for you. One of the most famous platforms is Robinhood. This online discount brokerage offers commission-free investing and trading with simple-to-use tools.
Most similar platforms have all-in-one investing apps that offer top-performing ETFs for you to start with.
If you did your homework well and picked some ETFs you’d like to purchase, the next step is to find their unique identifiers, called ticker symbols, and locate them in the “trading” section of your brokerage site. Then, decide how many shares you want to buy and ask the seller for the price of the ETFs.
“Ask price” is the lowest one the seller is willing to accept, and “Bid price” is the highest amount of cash you’re willing to part with for those shares.
After shopping around for the best ETFs to buy, you’ll now pick the order type. Depending on what you opt for, you’ll follow different instructions to execute your purchase.
The two most common order types are a market order - buying fast, at the best available market price - and limit order - buying once the ETF reaches a specific price.
Other types include a stop order, stop-limit order, and time in force. In case you’re working with a commission-based brokerage, make sure to have enough funds in the bank account linked to your brokerage account. Keep in mind that most brokerages do not require any commissions, though.
Et voila! You’ve just bought your very first ETF. Not only that you know the answer to the “What is ETF stock?” question, but you have your own ETFs. There’s no need to check your portfolio all the time, either. Instead, leave the shares and wait for their value to grow over time.
How do beginners buy ETFs?
If you’re an entry-level investor, the low risk and prices make ETFs the best option for you. We recommend you open a full-service brokerage account with a financial advisor or go for a robo-advisor account, so you have some assistance along the way.
Is it smart to invest in ETFs?
Yes, it is. Knowing how to invest in ETFs is a significant advantage these days. Aside from a low barrier to entering the market, ETFs are easy to buy and sell, and are also tax-efficient.
Can you lose all your money with an ETF?
Even though the stock market world is full of fluctuations and uncertainty, it’s very unlikely for any index fund to lose all of its value. Given the number of index funds they include, ETFs are much safer than other trading options.
Are ETFs safer than stocks?
Knowing how to invest in ETFs is a skill worth having, as ETFs tend to perform much better than stocks in terms of safety. An ETF represents a “basket” of stocks within the particular index it tracks.
Indexes have consistently performed better than individual stocks, and they recover more quickly even after stock market disasters; we believe it’s much safer to invest in them than individual stocks.
I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.
More from blog
Your email address will not be published.