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Ask the average person who doesn’t know much about the financial world to name something you can invest in, and they’ll probably say stocks. Companies like Microsoft or Tesla are known to the general public. Therefore, when people find out that they can buy a stake in businesses they’ve heard of, that instantly becomes more appealing than something that seems more ethereal like forex (currencies) or futures contracts.
Buying individual stocks can be profitable. However, there is another way. For those new to the financial markets, it’s possible to make a single investment and have an interest in multiple companies. You can do this through products known as exchange traded funds (ETFs). In simple terms, an ETF tracks the performance of an index. An index is a basket (i.e. collection) of financial securities.
It’s important to note that there are various types of ETFs, and some don’t track stocks. For example, you can get commodity and bond ETFs. However, the majority of ETFs do cover funds tracking stocks. Therefore, if you’re interested in stocks but want a way to spread your interest across multiple companies, ETFs could be a good option. Of course, if you’re going to invest in ETFs, it pays to have some sense of direction. With this in mind, here are three quick tips that could help you choose potentially profitable ETFs:
1. Know the Basics
Everything starts with the basics. If you don’t know what ETFs are or how they work, you’re destined to fail. We’ve explained how ETFs track the performance of an index and how an index is a collection of financial securities, such as stocks. You should also understand some pros and cons.
For example, ETFs allow you to spread your risk because they cover multiple stocks or assets. They can also be tax efficient if you invest in ETFs via an ISA or SIPP. However, you should also understand that ETFs have ongoing fees, and the returns might not always be as high as individual stocks or other assets.
2. Study the Statistics
Once you’ve mastered the basics, it’s time to assess the data. Only by looking at metrics such as the average 10-year return for an index can you identify potentially profitable investments. You should also take time to understand the index an ETF is tracking, and which securities (stocks in this case) are in that index.
For example, the S&P 500 is an index that tracks the 500 largest public companies in the US. Another popular index and, therefore, ETF, is the Global Clean Energy UCITS ETF. This ETF tracks the performance of stocks with a focus on environmentally friendly products and services. Looking at financial reports for companies within an index is a good way to get an overall view of its performance potential.
3. Invest Wisely
Everyone knows the phrase “invest wisely.” That’s good advice. All financial investments, whether it’s forex, ETFs, or something else, carry risk. Therefore, you shouldn’t stake more than you can afford. Determine what a suitable budget is and stick to it. There are no right or wrong answers here because it’s based on personal circumstances.
However, a good way to decide what’s suitable is to imagine what would happen if you lost all of the money you invested. We’re not saying that’s going to happen or that you should want it to. But you should be prepared for that to happen. If you can afford to lose it, then it may be a suitable amount to invest. As long as you keep this in mind and follow the other tips in this article, there’s plenty of potential out there if you invest in ETFs.
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Disclaimer
The information contained above is provided for information purposes only. The contents of this article are not intended to amount to advice and you should not rely on any of the contents of this article. Professional advice should be obtained before taking or refraining from taking any action as a result of the contents of this article. Sandra Hinshelwood disclaims all liability and responsibility arising from any reliance placed on any of the contents of this article.
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