How to start investing in the stock market? Start by listening to this
What is passive investing, and is it suitable for beginners?
Passive investing involves putting money into financial products that track a market index, like the S&P 500, rather than actively selecting individual stocks. This approach allows your investment to grow or decline with the overall market, making it a simple and convenient option, especially for beginner investors who may not have the time or expertise to manage a complex portfolio.
What is an ETF, and how does it differ from an ETN?
An ETF (Exchange Traded Fund) is an investment fund that holds a collection of stocks or other assets, usually designed to track a specific index. When you buy an ETF, you are essentially purchasing small portions of all the underlying assets within that index. An ETN (Exchange Traded Note), on the other hand, is a debt security issued by banks or financial institutions that promises to replicate the performance of an index. The key difference is that with an ETF, you own the underlying assets, whereas with an ETN, you hold a note from the issuer, meaning you don’t own the actual assets and are exposed to the issuer’s credit risk.
Which is generally safer for a beginner investor, an ETF or an ETN?
For most beginner investors, an ETF is generally preferable due to its structure. With an ETF, you actually own the underlying assets, which typically makes it a safer investment. ETNs introduce an additional layer of risk because if the issuing bank or financial institution goes bankrupt, you could potentially lose your investment, as you are essentially relying on their promise to pay.
How are ETFs and ETNs bought and sold, and can I access my money easily?
ETFs and ETNs are traded daily on stock exchanges, similar to individual stocks. You can purchase them through your bank or an online brokerage account by simply logging into your trading platform, selecting the ticker symbol, and placing a buy order. A significant advantage is their liquidity: you can sell them just like any other stock and withdraw your money whenever you wish.
What are the typical costs and risks associated with these investments?
ETFs generally have low management fees, and while ETNs might be slightly more expensive, they are still relatively affordable. It’s crucial to always check these fees as lower costs benefit long-term returns. The main risk involved is market fluctuation; if the overall market declines, the value of your investment will also decrease. These investments are subject to short-term volatility, so it’s essential to invest only money you can afford to lose or won’t need immediately, viewing it as a long-term strategy.
What are the expected returns and recommended holding period for passive investments like these?
Historically, broad market indexes such as the S&P 500 have averaged annual returns of about 7-10% over the long term. However, past performance does not guarantee future results, and returns can vary significantly, with no guarantees in investing. Passive investments are typically recommended for a minimum holding period of at least 5 years. A longer investment horizon helps smooth out market fluctuations and can potentially lead to better long-term results, mitigating the impact of short-term volatility.
How are gains and losses handled for tax purposes?
Profits from ETFs or ETNs are usually subject to capital gains tax, which depends on the holding period and local tax laws. If you realize a loss, you can typically use it to offset capital gains. In some jurisdictions, excess losses can even be carried forward to offset future gains. It is always advisable to consult a tax professional to understand the specific tax implications in your region.
Can I adjust my investment over time, and are there fees for doing so?
Yes, you have the flexibility to adjust your investments whenever you wish. For example, you can sell a portion of your ETF holdings to invest in a specific stock or another fund. These adjustments are executed through your brokerage account. Fees for such transactions vary by broker and typically involve minor transaction fees or commissions. It’s important to consider these potential costs when planning frequent adjustments to your investment portfolio.
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This article was written by Itai Levitan at investinglive.com.