How To Buy ETFs
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In this post, I will show you how to buy ETFs in detail, so without wasting time let’s start.

When we talk about investing in the stock market, we generally talk about investing in an asset class named Equity.
In Equity also, We have several categories to invest in. We can either invest in stocks directly, or we can buy ETF also. A mutual fund is another way to invest in the stock market, but it is less active. And the mutual fund is not the topic of this post; hence let’s avoid that.

The thing we are going to discuss in this post is – How To Buy ETFs. 
Before learning the process of buying ETFs, how about knowing a brief description of ETFs?

ETFs stand for Exchange Traded Funds. The general meaning brought out by these three words is that ETF is one kind of fund traded over the stock exchange.

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ETFs are much similar to any mutual fund, but they have some fundamental differences. ETFs are also a bunch of stocks traded on the stock exchanges, like the New York stock exchange, Nasdaq, etc.
If you want to know the differences between mutual funds and ETFs, jump to the FAQ section.

Now, let’s directly come back to our discussion on how you can buy ETFs.

  1. Open a brokerage account
  2. Make a strategy for investment
  3. Know about your ETFs
  4. Know when to exit

Let’s dive into detail.

1. Open A Brokerage Account To Buy ETFs

First things first, ETFs are funds that are traded on an exchange. That’s why to buy any ETF, you will need to have a brokerage account. A brokerage account is needed to buy ETFs and any stock traded on the public exchange.
There are different types of brokerage accounts. Here we are going to talk about some of them.

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Type of brokerage accounts

  • Taxable
  • Retirement account
  • 529 account
  • Financial Advisor

Taxable

A taxable brokerage account is the most common and popular brokerage account. By opening this account, you must pay a normal tax per the standard rate. There is no exclusive offer regarding taxes in this account.
Standard taxes will be applied according to capital gain in this account.

Retirement Account

A retirement account has the advantage of saving taxes. These accounts are preferred if your financial goal is mostly to secure the days after your retirement.
But, these retirement account has some disadvantages in terms of the annual credit limit. The maximum amount of stock / ETF brought annually should be less than $6000.

529 Account

A 529 account is best if you are aged below 30 (for younger people) and want to start a good habit of investing. A 529 account is probably the best account to cover educational expenses during or even before college life. The capital gains of a 529 account are free of cost unless it is expensed for any work other than educational expenses. Currently, 529 accounts have gained quite popularity as a source of expenditure for educational expenses.

Financial Advisor

Many brokers offer some extra facilities after opening a brokerage account with them. One of the best services that they offer is the personal financial advisor. Taking about ETFs, a personal financial advisor can help you to pick the best ETF according to your investment goals and capital. If you don’t want to spend time on financial planning, this provides an excellent opportunity.

That’s why it’s good to look at the extra services your preferred broker offers and the price point at which they offer them.

2. Make A Strategy For Investment

Before doing anything in our life, we must have a strong strategy for it. This is 100% true in the case of investments. A proper strategy of investment will help you to be a successful investor.
There are different kinds of ETFs. Investing all your wealth in just a single type of ETF makes no sense.

This is the case where asset allocation comes into the picture. As the saying of the greatest investor – Warren Buffet goes – ‘Don’t put all your eggs in one basket.’ – In the world of investment, it means that we should never allocate all our money to just one type of ETF / stock.
Though asset allocation depends on your capability to take risks and your age, still, a rough estimate can be gained from these lines that follow:

  • Equity
  • Bond / Fixed income ETFs

Equity

Equity ETFs are the type of ETF that has the best potential to grow and provide you with the biggest percentage of gain. But, as the chances of the percentage of returns grow, so does the risk. In Equity, the money invested in ETFs is invested directly in stocks. Their investor becomes a direct owner of the company they have invested in.
In short, while Equity has the best possibility to give you the best returns, it is also the riskiest asset of investment.

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Bond / Fixed income ETFs

Next, we have bonds and fixed-income ETFs. These are the types of ETFs that almost ensures a fixed return on your investment. But, the percentage of return is comparatively low in this case. Bonds and fixed income ETFs are great options to diversify and protect your portfolio.

The type of ETF you should invest in directly correlates with your age.

When you are younger age, you have better risk-taking ability. But, as you grow up, you tend to take lesser risks and want to save your capital.
That’s why you should buy more equity stocks / ETFs at an early age, which are generally considered riskier. And, as you grow up, you should invest your money in different government bonds with lesser risk.

3. Know About Your ETFs

When people get money in their hands, they seem unaware of the products they spend their money on. A similar thing applies to stocks and ETFs.
ETFs are collections of stocks, and it’s a fact that not every stock is great from an investment perspective. That’s why anyone purchasing ETFs should be careful of the stocks that are included in the ETFs.
If you are interested in a particular sector (let’s say – IT), you can purchase sector-based ETFs. Sector-based ETFs contain stocks that are from similar sectors.

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4. Know When To Exit:

A perfect investment strategy should include a specific time horizon during which you will hold the stocks, ETF. Everybody invests in getting an estimated percentage of returns over a certain period.
When investing, you should have in mind a particular time frame or an estimated percentage of returns after which you can exit your investment.
You can also take help from any financial expert if you fail to determine these things.

Conclusion

This article contains the basic facts one must know before buying any ETF and a brief guide to buying an ETF. We have covered every point – from choosing the broker to the timeframe you should hold and exit your investment. We hope that this article will be able to guide you on the path of making your first investment in ETFs. Comment down if there are any queries regarding this very topic.

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I am a well-skilled experience Stock Marketer and Investor. I have good knowledge of the stock market and investment. I have completed Bachelors in Finance And Investment from the University of Virginia (US).
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