Mutual funds and Exchange Traded Funds

Mutual funds and Exchange Traded Funds

There are a few similarities between mutual funds and exchange traded funds (ETFs).

They are both managed by professional managers (the people with deep knowledge in investing in financial markets) and diversification in investing as both of these financial instruments are portfolio of many individual company stocks or bonds.

The differences are:

You can trade ETFs on the stock exchanges anytime during the trading day. Their prices will fluctuate throughout the day similar to individual company stocks. In contrast, mutual fund shares are priced once a day after the markets close. ETFs, unlike mutual funds, provide an opportunity for speculative investors to bet on the direction of shorter-term market movements through the trading of a single security.

Since the ETFs trade through a brokerage firm, each trade therefore incurs a commission charge. To avoid letting commission costs negate the return realized, you should hold a low-cost brokerage account (trading costs under $10/trade) and invest in increments of $1,000 plus. ETFs thus are not good choices for small periodic investments, such as a $50-$100 per month dollar-cost averaging program as the same commission would have to be paid for each purchase.

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