Stock market investing is not for the faint of heart. Many people believe that stocks and ETFs (exchange-traded funds) are risky, confusing, and something best left to professionals.
While both investments are types of securities, which means they can be traded, each has its own risks and rewards that, when used properly, can help you grow your wealth over time.
Here’s a complete guide to stocks and ETFs so you can confidently invest your money in them.
What Are Stocks?
A stock is a share of ownership in a company. When you own stocks, you’re a part-owner of the company that issued the stock. You’re entitled to receive the company’s profits in the form of dividends.
The value of stocks fluctuates based on many factors, like the company’s financial health and growth potential, current market conditions, investor sentiment, and government regulation.
While stocks fluctuate in price, it’s important to note that the overall value of stocks can increase as a company becomes more successful and its stock price rises. But be aware that stock prices can fluctuate significantly. If you need to sell your stocks quickly, you may have to sell them at a lower price than what you paid for them.
What Are Exchange Traded Funds (ETFs)?
An ETF is a type of investment that tracks a specific index (such as the S&P 500 Index) or a specific asset (like gold or real estate). You can buy and sell ETFs just like stocks, and they’re often known as “bonds on steroids” because they offer higher returns than bonds.
ETFs are similar to mutual funds. But unlike mutual funds, ETFs are like stocks in that their value can change throughout the day. You can buy and sell ETFs any time the market is open. Mutual funds, on the other hand, are purchased as a “fund” and are priced at the end of the day.
ETFs are generally seen as less risky than individual stocks because they can be traded like a stock but with less risk. An ETF’s price may rise or fall throughout the day, but it will generally stay within a certain range determined by the index it tracks.
How To Invest In Stocks And ETFs
Make a Plan and Know Your Goals
Before you start investing, sit down and think about your investment goals. Then, create an investment plan based on your goals and risk tolerance. This will help you stay focused on your long-term goals and keep you from making impulsive decisions.
Diversify Your Portfolio
Diversification is a crucial part of investing. It’s about spreading your money across different types of assets, such as stocks, bonds, ETFs, certificates of deposits (CDs), and mutual funds, to reduce risk. When you diversify, you risk less because all of your assets won’t rise and fall at the same time.
Make Sure You Have a Cash Reserve
It’s important to have a cash reserve on hand in case you need to make an emergency withdrawal from your investment portfolio. Experts recommend keeping between three and six months’ worth of living expenses in cash so you don’t have to sell off any of your investments during a market downturn.
Stocks and ETFs are both long-term investments that allow you to own a piece of a company and collect profits in the form of dividends.
Remember that when you own stocks and ETFs, you’re also taking on risk because the value of your investments can rise and fall throughout the day. But when you invest in stocks and ETFs over the long term, you can build wealth and help diversify your investment portfolio.