What are Etfs? Are those Stocks? That is a commonly asked question. The answer is no so cut and dry. The fact is that sometimes they are both. Confusing, isn’t it? Let’s see if we can’t explore this subject and maybe clear up some confusion.
What are ETFs? Are those stocks? Free charts and quotes are available in a variety of places on the internet and the usual stock trading tools generally apply so it’s easy to expect that since they behave a bit like stocks, that they must be stocks.
ETFs are in fact exchange-traded funds. They’re traded on markets like stocks, but aren’t really stocks themselves. They’re more like a mix of mutual funds and a closed-end fund, which in and of themselves aren’t really considered to be “exchange traded.”
What are mutual and closed-ended funds? Mutual funds are bought and sold after the trading day has ended. This is based entirely upon the results of the trading day. Closed-ended funds are purchased thought the day. They are traded at priced that do not reflect on the actual value of the funds assets. Closed-end funds are traded on an exchange, but isn’t an exchange traded fund.
So if closed-end funds aren’t ETFs, what are ETFs? Are those stocks? ETFs are funds made up of securities and other assets. This makes them much like a mutual fund in structure, but because they can be traded throughout the day, they can be bought and sold like stocks.
Unlike stocks, though, exchange traded funds can’t be bought by the share by financial institutions. Rather they’re bought in blocks of tens of thousands to hundreds of thousands of shares or “creation units.” This bulk buying exists to limit variation between the actual value of the assets and the purchase price of the creation units.
Again you ask, What Are Etfs? Are Those Stocks? They are similar to stocks in some ways. You can short sell, put limit orders or sell options on them. They are for diversification of investments. They maintain tax efficiency and low expense ratios. It is possible to treat Efts like stock.
Investing and finance can be confusing. It is general rule that if you don’t understand how specialized investments work, then don’t invest in them until you do. If this article has still left you scratching your head, it may be wise for you to invest in something you are knowledgeable about and comfortable with. If you still want to invest in Efts, make sure you have done all your homework and understand the process.