If you’re new to investing and wondering where to start, Exchange-Traded Funds (ETFs) could be a good option. They offer a convenient way to invest in a diversified portfolio of stocks, bonds, or commodities. Think of ETFs like a grocery basket that allows you to purchase multiple items simultaneously. 

Unlike mutual funds, ETFs offer lower management fees and trade continuously throughout the day, similar to individual stocks. This means you can buy or sell them anytime throughout the trading day. Plus, ETFs don’t require a minimum investment, making them accessible to people with varied financial abilities.

While ETFs offer many advantages, they also come with some potential drawbacks. For instance, investors may incur trading fees, and ETFs can be susceptible to market fluctuations.

How to Purchase ETFs

To purchase ETFs, start by setting up a brokerage account. Then, conduct thorough research to identify suitable ETFs aligned with your investment objectives. Factors to consider when choosing ETFs include expense ratios, performance history, and asset allocation. You can fund your brokerage account via bank transfers or check deposits and make ETF purchases through the brokerage platform.

We’re here to help you with any questions you have about ETFs! Check out our Q&A section to learn more about choosing the right ETFs for you, the differences between ETFs and mutual funds, and why passive investing with ETFs can be a great option.

Pros and Cons of ETFs

Pros

 

• • Low Barrier to Entry: ETFs require no minimum investment, which makes them accessible to investors with varied financial capacities.

 

• • Diversification: Investing in a single ETF provides exposure to a diversified portfolio, which mitigates individual stock risk.

 

• • Ease of Trading: ETFs, similar to stocks, offer liquidity, facilitating buying or selling throughout the trading day.

 

• • Tax Efficiency: Taxes on ETF gains are deferred until sale, which grants investors control over tax liabilities.

Cons

 

• • Trading Costs: Despite lower management fees, investors may incur trading fees, although some brokerages offer zero-fee trading.

 

• • Volatility: ETFs, while offering diversification benefits, remain susceptible to market fluctuations, necessitating risk management strategies.

Get Your Feet Wet with Simulated Trading

Before investing in ETFs, it is a good idea to practice with a simulated trading platform. This will help you learn the entire investment process, from selecting the best ETFs for your portfolio to distributing a specific percentage or weight across each ETF and determining the optimal frequency for portfolio rebalancing based on your individual investment objectives.

Many online brokerage firms offer demo accounts, providing a risk-free environment for learning about ETF investment strategies. For example, eToro, a trading simulator, offers demo accounts with $100,000 in virtual funds for practicing ETF investments. You can also explore free trading simulators from reputable media outlets like MarketWatch, Investopedia, or JustETF.

TD Ameritrade’s Thinkorswim trading platform offers a paperMoney account you can register for, even if you don’t have an account with them. This platform provides real-time data to create a practice ETF portfolio. Remember that there may be a brief learning curve as you get used to the platform.

Since you are new to ETF investing, opt for a practice portfolio to gain confidence. Setting a designated learning period—perhaps two to three months—is essential to familiarize yourself with the process fully. However, remember that real learning occurs through actual investment experiences over time.

Once you are feeling comfortable with the portfolio you’ve created, it’s time to start investing in the real world. So below, we’ve provided you with a primer on how to begin purchasing your first ETFs.

Here is a guide on how to purchase ETFs:

To invest in ETFs, the first step is to enter the ticker symbol for the ETF you want to purchase. The ticker symbol, made up of letters, represents the security you want to buy. For instance, if you want to invest in an ETF that tracks the S&P 500, you can consider the Vanguard S&P 500 ETF, which has the “VOO.”

Essential ETF Concepts

Apart from the ticker symbol, there are some other essential concepts that you should be familiar with before investing in ETFs:

 

• • Ask price: This is the lowest price the seller is ready to accept for the ETF.

 

• • Bid price: This represents the amount a buyer is willing to pay for the ETF.

 

• • Quantity: You need to decide on the number of shares you want to purchase. For example, if you plan to invest $400, and the ETF costs $40 per share, you can buy 10 shares ($400 / $40 = 10 shares).

 

• • Order type: You have two options to place an order: market or limit. A market order allows you to buy the ETF immediately at the current market price. Alternatively, a limit order allows you to set the purchase price, and the order will only be executed if the price is at or below your limit.

 

• • Time in force: You need to define the duration your order remains active before it expires.

Setting up Your Account

You’ll need to set up a brokerage account to start purchasing ETFs. You can use an online brokerage to make your own investment decisions or a robo-advisor if you want automated investment management. 

To choose the right ETFs to invest in, do your research carefully. Look at things like expense ratios, performance history, and asset allocation. This is why setting up a simulator account through one of the platforms we mentioned earlier is important.

Once you know what you want to invest in, you’ll need to decide how you want to invest. You can invest a lump sum all at once or invest smaller amounts over time using dollar-cost averaging. 

Once you’re ready to invest, you’ll need to fund your brokerage account by depositing money via bank transfer or check. 

When you’re ready to buy ETFs, you can do it online through your brokerage. Enter details like the ticker symbol, order type, and quantity. Finally, when you’re sure everything is correct, click the buy button to complete your investment.

FAQ’s

Q1: What factors should investors consider when selecting ETFs?

When choosing ETFs, investors should prioritize factors such as expense ratios, diversification, and investment strategy alignment.

Q2: What distinguishes ETFs from mutual funds regarding trading and fees?

ETFs trade continuously throughout the day and typically have lower management fees than mutual funds. Mutual funds trade once daily and may entail higher fees.

Q3: What are the benefits of passive investing with ETFs?

Passive investing with ETFs offers cost-efficiency, lower fees, and tax advantages, making it an appealing long-term investment strategy.