Like stocks, you may have to pay a transaction fee to your brokerage for each trade. You can even purchase ETFs on margin and place limit orders. The authorized participant will essentially borrow shares of stocks and bundle them into a trust to form what's called ETF creation units, which are then bought and sold by investors just like a regular stock. Read our Fidelity review and invest in commission-free ETFs How do ETFs work?Īn ETF is created when an ETF manager files a plan with the Securities and Exchange Commission (SEC), later forming an agreement with an authorized participant (typically large broker-dealers) who will create ETF shares. "A fund is an ownership structure that allows an investor to own a portion of an underlying basket of securities." "Exchange-traded refers to the fund being able to be bought and sold during the trading day," says Curtis Bailey, a CFA charter holder and financial advisor at Quiet Wealth Management. Your investment could increase or decrease in value as the prices of the underlying stocks change.Īnd ETFs are traded during the day, much like stocks. When you purchase a share of the ETF, you become a partial owner of the fund. That means an ETF could hold thousands of underlying stocks. What is an exchange-traded fund (ETF)?Īn exchange-traded fund (ETF) is a basket of securities that is sold on stock market exchanges through brokerage firms. However, you'll also want to understand the costs and risks that come with investing in ETFs. You may be able to use ETFs as a low-cost and convenient way to diversify your portfolio. By clicking ‘Sign up’, you agree to receive marketing emails from InsiderĪs well as other partner offers and accept ourĮxchange-traded funds (ETFs) have become one of the most popular and important investment products.
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