Why Investing in ETFs Is the Smartest Way to Start Investing in the Stock Market
If you want to avoid major losses and mistakes as a newbie investor, you need to consider investing in ETFs first.
If there's anything that shows foresight, it's making a decision to start investing in the stock market. That being said, most people who start investing in stocks initially lose out on a decent amount of money before they get the hang of it.
Truth be told, stocks are a great investment—but you will need to know what you're doing. That's why experts often suggest getting into investing courses online, or why you regularly hear personal finance gurus talking about the importance of due diligence.
That being said, not all of us have enough time on our hands to learn how to invest in stocks like a pro. Many new investors also tend to feel lost when it comes to putting together a brokerage account. It's also possible that you want to cushion yourself against the losses that most newbies have.
Feeling lost? Try ETFs first. Well, here's why investing in ETFs is one of the best ways for newbies to kick off their stock market journey.
Just like stocks, ETFs are traded on major exchanges like the NYSE or NASDAQ. The big difference between ETFs and stocks is the number of companies that a single share invests in.
Standard stocks allow you to invest in one company. ETFs, on the other hand, are actually bunches of different company shares glued together into a single fund. Once the fund is created, you can buy a portion of that fund, or a share.
A typical ETF can have anywhere from a dozen companies to upwards of 1000. Because you're investing in multiple companies at once when you buy an ETF, ETFs are often called "portfolios" when traders discuss the companies that are in a fund's roster.
Investing in ETFs gives you an automatic amount of diversification.
If you're new to investing, it's important to understand how important diversifying your investments is. Companies can and do fail. When this happens, investors who put money into their stock will often lose all the cash they placed in.
ETFs have multiple shares of multiple companies in them. Some also may include other investment vehicles like bonds, gold shares, or cryptocurrencies. By adding a layer of diversification, you decrease the chance of total loss dramatically.
Newbies who aren't sure where to invest, or who aren't good with risk tolerance, will love this perk.
Not everyone has enough money to buy 10 shares of a company. Heck, even a single share of a high-priced stock like Berkshire-Hathaway's A Stock could put a hole in most people's pockets. This is a major drawback of traditional stock market investments.
Remember how we said ETFs are shares of "glued-together" investments? This means that each ETF share will have fractions of company shares. ETFs allow you to invest in these stocks without having to pay the price of a full share, giving you more access to quality stocks.
ETFs also happen to be professionally managed.
The benefits of investing in ETFs also extend to how your investments are managed. The perks of having someone whose job is to maximize investments looking over your portfolio are massive.
If you're new to investing, then you just won't have the same amount of knowledge and experience you need in order to make the best decisions. Professional ETF fund managers have training that will probably help you get better returns than if you decided to invest on your own.
Most investors also don't have the amount of time they would need in order to manage a similar portfolio. By letting others manage your ETF portfolio, you're able to get good returns without having to check your fund every day.
Simply put, ETFs offer you a way to "set it and forget it" without too much issue.
People who are low on funds and don't have hundreds to start investing in the market with really should consider ETFs as a starter choice, primarily because of the cost perks.
You don't need much money at all when it comes to starting an investment portfolio featuring ETFs. Many of the newest investing apps have made the startup costs even lower, with many apps now offering fee-free ETF investments.
With regular stocks, you have to pay a commission to a financial advisor or stock broker every time you trade. ETFs? Not so much. Many apps allow to trade them without commissions, even if it means a higher cost ratio later on.
A good example of this is Stash. Stash is one of the most famous apps on the market when it comes to introducing investments to newbies, and it started out by getting individuals to invest in ETFs that were created by the company. Stash users can invest as little as $5 in fractional shares of ETFs—and honestly, that money adds up.
Those who don't have much money to begin with need to consider investing, simply because it's the easiest route in terms of cost thanks to the new rise of apps.
ETFs can have themes tailored to different interests and goals.
Even if you're not a newbie to investing, there's something to be said about getting investments that match your personal goals and interests. Where you invest can make a huge difference in how the world plays out.
One of the perks of investing in ETFs is the fact that you can choose ETFs that are built around themes that interest you. For example, people who want to try socially-conscious investing may want to get an ETF that offers fair trade products.
There currently are ETFs that are themed around industries, social responsibility, returns, and risk. No matter what your "type" of investing is, there is probably an ETF based on your interests.
In many situations, the very apps that allow you to invest in ETFs are part of the reason why investing in them tends to work the best for newbie investors.
Many apps that use ETFs as a main investment vehicle, including Stash, Acorns, and Stockpile, all have specialized coaching modules that help new investors learn financial skills. People who want to learn the ropes of investing in easy to understand micro-bites will love this perk.
Generally speaking, ETFs tend to match the market pretty well.
Because they are heavily diversified and professionally managed, ETFs tend to mean that you will be able to expect returns similar to stock market indexes. If you're worried about lower-than-market returns, getting your hands on ETFs can help reduce that fear.
One thing to keep in mind is that you don't have to build a portfolio solely around ETFs if you don't want to.
Even if you don't want to go full-force into the ETF world, have them as a way to help reduce the chances of losing a fortune if you decide to focus on regular stock investments.
Finally, seeing the stable growth of a good ETF is enough to keep encouraging you to invest.
If you ask any investor who's seen decent returns, one of the most rewarding aspects of investing in an ETF is seeing your wealth grow without you having to work for it.
Many new investors get discouraged when they see their stocks dip, and if they're very unlucky, they could end up having their first investments wipe out. With ETFs, there's more stability and a much higher chance of growth. Once you see those numbers increase, you'll be bitten by the investing bug and won't ever want to stop.