As the stock market developed, there were more and more issuers (companies) issuing shares. At one point, tracking the overall picture in the market and in various sectors of the economy became incredibly labor-intensive, since it was necessary to keep track of the changes of each company manually and synthesize individual results into one mosaic.
This is how market participants came to the need to create indices. (RTS, China A50, S&P 500).
Passive investors have a question, what if I don't want to delve into the inner world of every company, study its strategy, and take its risks?
I like how the market as a whole is developing. Here's how to buy a slice of the market (index) rather than 10-20 stocks?
They began to count:
The S&P 500 includes five hundred companies, the most expensive share of which is from Amazon ($ 1,819), which means
1819 * 500 = 909 thousand $.
This is the minimum required amount of investment capital for which we can get S&P 500 shares in equal monetary proportion among all the companies included in the index.
Not everyone has that kind of money … What to do? And let's find 1000 people, chip in for $ 909 and all together will own our portfolio with a 0.1% share. This is how mutual funds appeared.
Mutual funds are the closest relatives of ETFs, what makes them different?
An ETF is a fund that issues its own securities.
So, ETF (Exchange Traded Fund) is a fund whose shares are traded on an exchange and they are secured by the property of the fund. (Stocks of other companies, raw materials, bonds, etc.)
By buying ETF shares, you are buying your piece of the pie.
- diversified financial instrument.
- there is no need to follow the development of individual companies (you still need to look at the general economic background).
- the opportunity to purchase what you want for much less money.
Cons of ETFs
- loss of a small part of the profit due to the maintenance of the fund. Yes, the fund is a rather complex organization, where more than a dozen people work, and their work is paid from the pocket of each fund shareholder.