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Exchange Traded Funds

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Exchange-Traded Funds

Exchange-traded funds (ETFs) are similar to index funds (a "passively" managed mutual fund that tries to mirror the performance of a specific index, such as the S&P 500 or the Dow Jones Industrial Average.), but with one important distinction: they trade as a regular stock on the stock exchange market.

When you buy a share in an ETF, you are buying a share in a unit investment trust or another type of trust. In order to create an ETF, similar to mutual funds the trust combines and diverisya many different investments into one basket and then sells shares in the trust on a stock exchange. ETFs always combine the investments that are in an index; they never track actively managed mutual fund portfolios (because most actively managed funds only disclose their holdings a few times a year).

As an investor you can do anything with an ETF that you could do with any other stock on the market, such as short selling. Because ETFs are traded on stock exchanges, you can buy and sell them at any time during the day (unlike most mutual funds). Their price will fluctuate from moment to moment, just like any other stock's price, and you'll need a broker in order to purchase them, which means that you'll have to pay a commission.

Some major positive benafits of ETF's are more tax-efficient than normal mutual funds, and since they track indexes they have very low operating and transaction costs associated with them. There are no sales loads or investment minimums required to purchase an ETF.

The first ETF created was the Standard and Poor's Deposit Receipt (SPDR, pronounced "spider") in 1993. SPDRs gave investors an easy way to track the S&P 500 without buying an index fund, and they soon become quite popular. Shortly thereafter, a number of other ETFs came onto the market, including "cubes" (which track the Nasdaq 100 under the symbol QQQ) and "diamonds" (which track the Dow under the symbol DIA). Today you can buy ETFs for dozens of different indexes. Brokerage firms are willing to pay high prices for exchange seats because of the profit opportunities available from membership in an exchange. Profits can be generated from the fees charged for the execution of trades as well as from trading on the firm's own account. There are, however, risks associated with brokerage firm activity. For example, brokerage firms can lose money if their clients default on margin loans (loans obtained to purchase securities). Well when you open an ONLINE Stocks exchange account, you shall be aware of the ways to open one. There a lot of traders and a lot of different sign-up process too. Well, to be guided here are some sample situations. Please note that these samples are based on the major key elements.

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