What Are Etfs? Are Those Stocks?

Posted on August 25, 2008
Filed Under Share Trading |

You’ve asked yourself those questions before, I’m sure. But the answers aren’t a simple yes or no, in fact the answer is sometimes both. I’m sure that doesn’t actually clear anything up, but let’s take a walk around the idea of ETFs to get a better understanding.

Are Efts stock? The internet is full of free chart and quotes. These tools are often used and given that they generally apply, it is easy for one to expect since Efts behave like stocks, then they must be stocks.

Efts are actually fact exchange-traded funds. They are similar to a mix of mutual funds and closed-ended funds. They are really not considered to be “exchange traded”. Even thought they are traded on markets, they are not stocks.

Closed ended funds are traded on an exchange, but are not considered to be an exchange traded fund. They are bought and sold through the trading day at prices that do not reflect on the real value of the funds assets. However, mutual funds are bought and sold at the end of the trading day, based on that day trading results.

What Are Etfs? Are Those Stocks? They can be sold like stocks, because they can be bought and sold throughout the trading day. However, they are actually funds that are made up of securities and are structured more like mutual funds.

Exchange traded funds like Efts are contrasting to stocks because financial institutions cannot buy them by the share. Instead, they are purchased in “creation units”, or blocks of tens of thousands to hundreds of thousands of shares. Buying in bulk shares limits the variation between the actual value of the asset and the price the creation unit was purchased at.

Again you ask, What Are Etfs? Are Those Stocks? You can treat them as thought they are stock. They are for easy diversification of investments. They hold tax efficiency and keep low expense ratios. It is possible to short sell Efts. It is also possible to put limit orders or sell options on them. In these ways, they do work like stock.

Finance can be confusing. It reading this has done nothing to clear it up for you; my advice would be not to invest in Efts yet. Make sure you understand the entire process of specialized investing prior to sinking your cash into it. It is always best to invest in something that you are comfortable and knowledgeable about.

Comments