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Beginning your stock portfolio in Canada
(ETFs), and individual stocks. All three serve the purpose of investing in the stock market and all have
their own respective benefits. The difference between mutual funds and ETFs to that of stocks is that
the former groups (mutual funds & ETFs) allow you to invest in many different companies by making
only one purchase, while purchasing one stock results in owning only one company.
As you know, putting all your eggs in one basket can be dangerous, so if you were to pick individual
stocks, you would need to make sure you're not too heavily invested in one area of the economy, in
addition to doing considerable research on each stock. For example, if you invested your money into
Apple, Google, and Microsoft and the technology sector was going through a rough patch, chances are
that you would be losing a lot more money than if you had invested in companies in different sectors
like Coca-Cola, Nike, and Johnson & Johnson. The good thing is that you can avoid having to <a
href=http://www.stinkingrichcanadian.ca/>pick multiple stocks </a>and be concerned with
diversification by actually just purchasing a single ETF or mutual fund.
The major difference between mutual funds and ETFs is that mutual funds are actively managed while
ETFs are passively managed. That means that when you invest in a mutual fund, you are giving your
money to an investment manager who then ëactively managesí your stocks, buying and selling what
they perceive as a good investment. How much you make is a direct result based on that manager's
stock picking ability. This greatly differs from ETFs which actually don't actively manage your money.
When you buy an ETF of the stock market index (a broad range of stocks), you are actually investing in
the average of the stock market performance. This way, you need not be concerned about how the
manager performs and if he or she is doing a good job. This also means that your stocks will perform
at the average - No striking it rich too quickly, but no going broke either.
Mutual fund companies and ETFs make their money by charging a commission based
upon how much money you invest with them. For example, if one year you invested $5,000 in a mutual
fund that charged 2.5%, you would be paying them $125 for that one year of service. ETFís on the other
hand tend to be much cheaper than mutual funds since you donít need to pay someone to do the
tedious work of picking stocks. Often these fees are less than 0.5% (only a $25 fee in the previous case).
The difference is that you would have to pay transaction costs to buy the ETF, while your bank may
provide the service of purchasing the mutual fund for free. Transaction costs are important, so if
youíre someone who invests in little portions frequently, rather than one large lump sum, mutual
funds would be better in that case, even though youíre paying higher annual expenses.
Best of luck in the stock market and be sure to research your purchases carefully.
