Investing Made Simple

By: footdoc77
EXCHANGE TRADED FUNDS (ETF)
The best way to trade the stock market

Let’s face it in good years when the stock market is soaring everyone seems to be a stock market genius. Heck, you can throw darts at the Wall Street Journal and pick winning stocks. The problem for all of us is when the market travels either sideways or worse yet, moves in a downward direction. Then what do you do as it becomes increasingly harder to find winning stocks.
I have read in more than one source that a given individual stock aside from the fundamentals of the stock itself is influenced by a number of factors. This includes falsely pumping up the value of the security by company executives as well as the Wall Street bankers looking to make a quick buck off the backs of “regular people” like us.

More importantly perhaps is the fact that the movement of an individual stock may be influenced by factors beyond its control. For example it is estimated that 70 percent of the stocks movement is influenced by the movement of the stock market itself. So, your stock may have great fundamentals, but if the overall movement of the stock market is down, guess what, your stock if probably going with it.

Twenty percent of a stock’s movement is influenced by the sector that it is in (banking, textiles, health care, etc.), so again even with good fundamentals, if your stock is in a poor performing sector there is a good chance the price of the stock is moving south.

Lastly, about ten percent of a stock’s movement is influenced by the stocks actual fundamentals and as stated earlier in many instances these fundamentals are manipulated. Remember Enron, Tyco, etc.?

So how does the average investor eliminate all these potential shortcomings when investing in the stock market? Exchange Traded Funds or ETF. These are funds that are traded like stocks, you buy and sell shares just as you would with any equity, but they mimic mutual funds in that the ETF’s are made up of a basket of individual stocks.

Exchange Traded Funds come in various shapes and sizes meaning you can trade whole markets, such as the Nasdaq, you can trade complete sectors. Additionally you can trade specific styles of stocks such as large cap, mid cap, value cap, etc.

You can also trade foreign equities, commodities and real estate. Since they trade like individual stocks you can buy and sell them anytime during the day while the market is open.

Lastly they are transparent, you know exactly what you are trading and they allow for easy diversification.

You can trade markets like the S&P 1500, SPDR or Spiders which mimics the S&P 500, the NYSE Composite Index Fund which corresponds to the NYSE Composite Index., the Russell 3000 Index and of course the most popular is the QQQQ which corresponds to the Nasdaq 100.

Within these groups there are funds that attempt to double the return of these indexes as well as funds which attempt to short the indexes, so you can trade them in any market environment. Plus there are options available on them for those that prefer that method of trading.

Another nice thing about Exchange Traded Funds is that if you play a lot of money in the market, because of the huge size of these funds, they are always redeemable. Although that concept is probably true with larger stocks, some thinly traded stocks may cause you a problem if you attempt to sell a large quantity at one time

The Exchange Traded Funds are superior to mutual funds for a couple of reasons. One there are far less expenses associated with ETF’s compared to mutual funds and as previously stated the ETF’s can be bought and sold anytime while the market is open compared to mutual funds where the buy and sell price is determined at market close.

In conclusion I believe it is much easier to determine the potential direction of the overall stock market than an individual stock at any given time and for that reason and the reasons listed , trading Exchange Traded Funds is a much smarter investment move.