When you invest in an ETF by buying shares, you are essentially buying a stake in the entire pool of securities held by the fund. This is different from investing in individual stocks or bonds of specific companies. Instead, you’re getting a piece of the whole pie. By owning shares of an ETF, you gain exposure to a diversified portfolio of multiple investments, which helps to add diversity to your overall investment portfolio. 

ETFs operate much like traditional mutual funds, but unlike mutual funds, you actually can buy or sell ETFs on a stock exchange, just like you would with regular stocks.

In this article, we’ll cover:

• How ETFs work
• Advantages of ETFs
• Disadvantages of ETFs
• Types of ETFs
• Choosing an ETF
• Exchange-traded fund FAQs

How do ETFs work?

ETFs can give you relatively easy investment access to a broad range of asset classes; instead of buying shares of multiple different securities, you get exposure to all the securities held by the fund.

Just like stocks, you can purchase shares in an ETF through a brokerage and trade them anytime during the stock market’s operating hours. The share price may change throughout the trading day as they are bought and sold on the market. Investors make money when assets within the ETF grow in value or generate profits in the form of dividends or interest.

ETF fees

All funds have management costs, and the fund’s strategy can affect how much you pay. As a general rule, passive funds are less expensive than active funds. Here’s the difference:

• Passive funds aim to match a market index, like the Dow Jones Industrial Average or the S&P 500, and most ETFs fall into this category. Fund managers make investments that mirror the index, which minimizes the need for frequent trading. Thus, fees tend to be lower.
• Active funds seek to outperform an index or achieve some other goal. For example, a fund might attempt to track a market sector, like technology or healthcare. That typically requires more oversight from management, including trading, and which can translate into higher fees.

In addition to management fees, ETFs may come with other costs, such as commissions or bid/ask spreads. 

Benefits of ETFs

If you’re new to investing, ETFs can be a great way to get started. ETFs allow you to invest in several assets at once without the pressure or risk of going all in on an individual commodity. Compared to mutual funds, ETF fees are generally lower, and most funds disclose their holdings on a daily basis, making it easier to track performance. These funds may be an efficient way to dip your toe into the world of investing, and they have long-term payoff potential as well.

• Built-in diversification: ETFs contain a basket of diverse investments, which could cushion your portfolio if a single commodity loses value.
• Many options: With over 1,700 ETFs traded on US markets, there’s an ETF available to match a wide range of investing goals interests, and you can gain investment exposure to an entire sector through a single ETF.
• Potential for lower fees: While the mutual fund might involve higher management fees due to its active management approach, the ETF’s fees tend to be lower. With ETFs, you can potentially keep more of your investment returns in your pocket, allowing your wealth to grow over time.
• Intraday trading allowed: ETFs can be traded throughout the day, just like individual stocks. This means you can seize those favorable moments, making adjustments to your portfolio when it matters most.
• Tax efficient: Often, ETFs distribute smaller and fewer capital gains, which can lower the amount of tax you have to pay.

Invest in ETFs.

Diversify your portfolio with a single investment.

Learn more

Downsides of ETFs

ETFs have many possible benefits, any type of investment presents risk, and ETFs are no exception. While investment advisors often praise the built-in portfolio diversification, it’s not necessarily a given. Additionally, some may come with higher fees or other costs.

• Diversity isn’t guaranteed: While ETFs contain multiple securities, they can be concentrated in one market segment or asset class, offering more limited diversification. 
• Fees can be higher: Passively managed ETFs are often celebrated for their lower fees compared to mutual funds. However, some ETFs are actively managed by professional managers who make investment decisions. These active ETFs may come with higher costs to cover the expenses associated with active management.
• ETFs can be risky: Although many see ETFs as lower risk than individual stocks, every fund has a different level of risk; inverse ETFs and leveraged ETFs are usually considered high-risk and unsuitable for inexperienced investors.

Types of ETFs you can invest in

When it comes to investing in ETFs, there are several types to choose from. These funds usually have a particular focus or objective, like matching the performance of an index, investing in specific sectors, or implementing a particular investing strategy. You can select an ETF that best supports your investment goals, risk tolerance, and personal interests.

• Market ETFs
• Passive ETFs
• Active ETFs
• Sector ETFs
• Thematic ETFs
• Bond ETFs
• Commodity ETFs
• Foreign market ETFs
• Currency ETFs
• Inverse ETFs
• Leveraged ETFs

Market ETFs

Market ETFs, also known as equity funds, are designed to track specific market indexes, such as the S&P 500 or Dow Jones Industrial Average. These indexes represent a basket of securities from various companies that collectively represent the overall market. When you invest in a market ETF, your goal is to closely replicate the performance of the underlying index. This means that as the index goes up, your ETF should follow suit. And when the index experiences a dip, your ETF’s value may fluctuate accordingly.

A market ETF’s success depends on how closely the ETF tracks the underlying index. Factors such as the ETF’s management strategy, transaction costs, and tracking error can impact how well the ETF mirrors the index’s performance. Make sure to do your research and find an ETF that has a track record of closely aligning with the index you want to follow.

Passive ETFs

Passive ETFs generally follow a buy-and-hold indexing strategy designed to mirror the performance of a specific benchmark or index. These benchmarks can range from widely recognized market indices like the S&P 500 or the Dow Jones Industrial Average to sector-specific or asset-class-focused indices. By tracking a benchmark, passive ETFs aim to provide investors with broad market exposure. Passive ETFs are also considered budget-friendly. These funds tend to have lower costs because they don’t play the trading game as actively managed funds do.

When exploring passive ETFs, take a peek at the benchmark’s characteristics. How was the team chosen? What is their methodology? What is their track record? These factors can help you align your goals, tolerance for risk, and desire for diversification

Active ETFs

In contrast to passive ETFs that follow a set benchmark, active ETFs have a manager or team of experts who make strategic decisions about portfolio allocation. They bring their experience and knowledge to the table, allowing them to deviate from the index when they see opportunities. Because the active management approach requires far more effort, an actively managed ETF generally has higher management fees compared to a passive ETF.

The fund manager’s goal is to generate attractive returns by actively selecting investments they believe will outperform the broader market or achieve a specific investment objective. But while active ETFs offer potential rewards, it’s important to be aware of the risks. Market volatility can impact the performance of active ETFs, as their success relies on the ability of the managers to make accurate investment decisions. The market can be unpredictable, and even the most seasoned managers face challenges in timing the market effectively.

When considering active ETFs, it’s crucial to assess the track record and investment strategy of the fund’s manager or team. Look for a proven history of successful portfolio management, a consistent investment approach, and alignment with your investment goals. 

Sector ETFs

Similar to a market ETF, these funds aim to match the overall performance of an index, but focus on a specific sector or industry, such as technology. These funds may offer diversification within a given sector, but if the entire sector’s performance falls, the value of the fund’s shares may also drop.

Thematic ETFs

Even more narrowly focused than sector ETFs, these funds target a subset of a sector; for instance, the fund may invest in stocks related to esports or video games rather than technology overall. The narrow focus of these funds may tend to offer less diversification.

Bond ETFs

Also called fixed-income ETFs, these funds invest exclusively in bonds. Because bonds tend to be less volatile than stocks, they’re often considered lower risk. Bond ETFs can be an excellent addition to your investment portfolio, offering stability and balance in comparison to the potentially higher volatility of stocks.

It’s important to remember that while bond ETFs offer lower risk, they are not without risks. Factors such as interest rate changes, the credit quality of the underlying bonds, and macroeconomic conditions can impact bond prices and returns.

Commodity ETFs

Commodities are raw materials such as oil, gold, and agricultural goods. Some commodity ETFs actually purchase the commodities, though this is limited to precious metals. Other funds invest in companies that produce or handle commodities; this can give investors exposure to commodities without the costs associated with the physical possession of goods. 

Foreign market ETFs

Like market EFTs, these funds attempt to mirror an index. The difference is that these target a non-U.S. index, like the Nikkei Index, an index of the Tokyo Stock Exchange. Foreign market ETFs could bring more geographic diversity to your portfolio.

Currency ETFs

Currency ETFs, also called foreign currency ETFs, track the relative value of one or more currencies. These funds can give investors exposure to trading currencies without the complexity and burden of trading on the foreign exchange market.

Inverse ETFs

Unlike most other funds, these ETFs are designed to increase in price when a given market index declines in price. Inverse ETFs require active management, which may increase fees, and they tend to represent a significant risk.

Leveraged ETFs

Leveraging, an investing strategy that uses borrowed funds to buy options and futures to increase the impact of price movements, can lead to significant gain and equally significant loss. Since leveraged ETFs follow this strategy, using financial derivatives and debt to boost the returns of an underlying index, they can be just as risky.

> Explore ETFs to learn more about the different types offered.

How to pick an ETF

With so many types of ETFs, it may feel overwhelming to choose the right fund to invest in. Let’s dive in with an approach that keeps it real, while focusing on the bigger picture.

1. Know your investment objective

Start by asking yourself what you hope to achieve with your investment. Are you looking for long-term growth, stable income, or specific sector exposure? Understanding your objective will help you narrow down the options and focus on the ETFs that can help you reach your goals.

2. Assess costs and operating expense ratios

Expense ratios are like the price tags on ETFs, representing the annual costs you’ll incur as an investor. These ratios cover the fund’s management fees, administrative expenses, and other operational costs. It’s important to pay attention to expense ratios because they directly impact your investment returns. 

Lower expense ratios generally mean more money in your pocket for growth. They can have a significant long-term impact on your investment growth, especially when compounded over time.

3. Understand the impact of expense ratios on returns

It’s important to see the bigger picture when it comes to expense ratios. These seemingly small numbers can have a significant long-term impact on your investment growth.

4. Evaluate the ETF’s index and tracking record

Another critical factor in choosing an ETF is the index it tracks. Does the index align with your investment objectives? Is it broad-based or specific to a sector or asset class? Understanding the index composition will give you insights into the underlying assets and the potential risks and rewards associated with the ETF.

Additionally, take a look at the ETF’s tracking record. Has it closely followed its underlying index over time? Consistent tracking performance is an indicator of a well-managed ETF and can increase your confidence in its ability to deliver the desired investment exposure.

5. Consider market position and competition

The ETF market is constantly evolving, and competition among fund providers is fierce. It’s worth considering a fund’s market position and the presence of similar offerings. The first ETF issuer for a particular sector often has an advantage, as they have the opportunity to gather assets before competitors enter the market.

Protect your portfolio with a diverse and defensive strategy

Whichever assets you choose, it’s usually wise to protect your portfolio with a diverse and defensive investment strategy. A single investment in an ETF can provide diversification and the flexibility you need to stay defensive as your portfolio grows. Stash can help you start investing in ETFs; with over 90 options, you can find the fund that matches your investing goals. 

Investing made easy.

Start today with any dollar amount.

Get Started

ETF FAQ

1. Are ETFs good investments for beginners?

They can be. ETFs offer some diversification in a single purchase, they are often less expensive than mutual funds, and there’s one for virtually any investment strategy. 

That said, not all ETFs are created equal. Some are quite risky, and not all add meaningful diversity to a portfolio. As with any investment, it’s important to fully understand an ETF before buying shares.

2. Are ETFs safer to invest in than stocks?

It depends. For example, a market or index ETF is likely less risky than any given individual stock, because it relies on the performance of many companies, rather than just one. If one company’s value falls, others may rise, shielding you from the struggling company’s price dip. On the other hand, a leveraged ETF is probably riskier than buying shares of a long-established company with many decades of stable performance. 

As a general rule, a basket of stocks tends to be less risky than an individual stock, but it’s important to research any investment before buying.

The post What Is an ETF? Definition and Guide appeared first on Stash Learn.

In this article, we’ll cover:

• Fractional shares vs. whole shares
• How fractional shares work
• The benefits of fractional share investing
• The disadvantages of fractional shares
• Things to know about fractional share investing

The difference between fractional shares and whole shares

A whole share is a single share of a company’s stock, an ETF, or some other investment. Shareholders might sell for a profit, receive dividends, and vote on important company issues. But whole shares can cost hundreds or even thousands of dollars, putting them far out of reach for many investors.

If you imagine a whole share is a pie, fractional shares are slices of that pie. The pie can be divided into a few slices or a great many. Fractional shares offer many of the benefits of whole shares at a lower purchase price. 

Here’s an example: 

• Alex wants to invest $100 in Company B, but a single share costs $1,000. 
• Alex’s brokerage offers fractional shares of Company B’s stock. 
• Alex invests $100 and receives a 0.1 share of Company B. ($100 / $1,000 = 0.1)
• When Company B’s stock price rises or falls, the value of Alex’s investment rises or falls proportionate to the fractional share. 

While fractional shares allow you to invest with less money compared to whole shares, they aren’t available at every brokerage, and they may come with certain fees and limitations.

How fractional shares work

If you invest with a brokerage firm that offers fractional shares, you can purchase them like you would any other investment, like whole shares of stocks, ETFs, or mutual funds.

Until 2019, it was virtually impossible to purchase fractional shares directly from a brokerage. Many retail investors, however, were priced out of higher-value securities in the stock market. So brokers created fractional shares of popular investments, some priced at only a few dollars, to woo younger, middle-income investors. Nowadays, many brokerage firms offer fractional shares of both stocks and funds. 

To create fractional shares, brokerages purchase full shares, slice them into fractions, and parcel out the slices to multiple investors. That’s why fractional shares typically can’t be transferred to a different broker if you switch investment firms; instead, your broker will usually buy back your fractional shares. In that case, you’ll owe taxes on any profit you make from selling your shares back to the broker. 

Fractional shares created through DRIPs, stock splits, and mergers

Fractional shares are sometimes created as a consequence of dividend reinvestment programs (DRIPs), stock splits, and mergers and acquisitions. In some cases, whole shares you own may become fractional shares.

DRIPs, which repurpose dividend payments to purchase additional shares of the same investment, result in fractional shares whenever share prices exceed dividend payments.

A type of stock split may also produce fractional shares. There are two types of stock splits: a forward stock split, in which more shares are created, and a reverse stock split, in which shares are consolidated to create fewer whole shares. The value of your overall investment doesn’t change; the only alteration is the number of shares you own. 

A reverse stock split might result in whole shares you own becoming fractional shares. Here’s a hypothetical example of it might work: 

• Imagine Jaylen owned two shares of stock in Company X, each worth $100. The total investment is worth $200. ($100 * 2 = $200) 
• Company X conducts a 1:4 reverse stock split. In a reverse split, shares are consolidated to create fewer overall shares. Thus, after a 1:4 reverse split, every $100 share is a 0.25 fractional share worth $100. A full share costs $400.
• The reverse split converts Jaylen’s two whole shares, worth $100 each, to two 0.25 fractional shares worth $100 each. 

When a company merges with another company or is acquired, fractional shares may also be created, depending on how the merger or acquisition is structured.

Benefits of buying fractional shares

The availability of fractional shares has opened new doors for many investors. It takes less money to invest in stocks, giving you access to a wider pool of investments, especially stocks with high share prices. As a result, you might be able to start investing sooner and find it simpler to diversify your portfolio. 

Key fractional share investing benefits include:

• Start investing with an amount that fits your budget
• Invest in stocks that match your interests and strategy
• Get access to investing in more expensive stocks
• Explore investments in more types of securities
• Find more options for portfolio diversification

Fractional shares allow you to start out small, but you can still potentially earn a return on your money. That’s especially true if you have a long time horizon for your investment. Even small beginnings can earn you money, and with the power of compounding, they can grow significantly given enough time.

Disadvantages of fractional shares

So what are the drawbacks of purchasing a fraction of a share? They vary significantly among brokerages; you may find differences in trading rules, costs, fees, and more. It’s always critical to do your research before investing, and fractional shares are no exception.

Potential disadvantages to consider include:

• Limits on when, how, and what you can sell
• Fees for trading fractional shares
• Lower dividend income and profits
• Lack of stock voting rights
• Risk of illiquid shares that are difficult to sell
• Tax consequences when changing brokerages

Fractions or full shares: multiple paths for your portfolio

Fractional shares may be worthy of careful consideration, especially for new investors. They can open opportunities to investing that align with your budget, allowing you to start investing and diversifying your portfolio more easily. At the same time, they can come with restrictions that could surprise an unwary investor. 

If you’re interested in fractional share investing, you’ll find options at many brokerages, like Stash. Take the time to do your research, and you may find yourself investing in the stock market with more confidence.

Investing made easy.

Start today with any dollar amount.

Get Started

Fractional shares FAQ

1. Do fractional shares add up to whole shares?

Yes, although not in your portfolio. The brokerage buys a full share, divides it into slices, and sells the slices to different investors. It is possible to buy enough fractional shares of one stock to equal a whole share. For example, if a stock was available to purchase as 0.25 fractional shares, buying four of those fractional shares would equal a whole share. (0.25 x 4 = 1)

2. Do fractional shares pay dividends?

If an investment pays dividends, fractional shareholders receive a proportional share. For example, if Stock D paid a dividend of $10 per share and you owned a 0.5 share, the dividend payment would be $5. ($10 * 0.5 = $5)

3. Is it better to buy fractional shares or whole stocks?

Ultimately, that’s a question every investor must answer for themselves. But fractional shares might be a good fit for your portfolio if you’re new to investing, or want more diversification in your portfolio without investing a lot more money. It’s also important to understand your brokerage’s rules and costs. In some cases, you might face limitations or fees that tip the scales away from fractional share investing.

4. Is it worth buying fractional shares?

The answer depends on your financial situation, your investment strategy, and the brokerage you’ve chosen. For example, you might discover fees that make fractional shares seem less worthwhile. Or you might want the freedom to transfer your portfolio; fractional shares are typically not transferable between brokerage firms, and liquidating them can have tax consequences.

That said, fractional shares offer a great deal of flexibility. To decide whether fractional shares are right for you, consider your long-term goals, brokerage fees and costs, and how closely its rules align with your financial strategy. And remember that all investments involve risk, including the risk that you could lose money.

5. Are ETFs available as fractional shares?

Sometimes. Each brokerage chooses the securities it will sell as fractional shares; some offer fractional shares in ETFs.

6. Can you sell fractional shares?

As a general rule, brokerages allow you to trade your fractional shares, although each has different rules and costs. But your brokerage may not guarantee liquidity. Liquidity measures how quickly and easily you can sell an investment without taking a loss. Lack of liquidity, or illiquid shares, can take longer to sell, and you might lose money. 

7. Are fractional shares included in DRIPs?

A DRIP uses dividends you earn to purchase more shares of the same security. DRIPs frequently result in fractional share ownership, because any given dividend payment might not be enough to buy a full share of stock.

How to invest in fractional shares with Stash

Learning how to invest in fractional shares can be simple with Stash. Just open an account, choose the investments that interest you, and Stash does the rest. Stash offers fractional shares of ETFs and single stocks, starting at any dollar amount. If you’re not sure where to start, you might try the Smart Portfolio, which creates a portfolio aligned with your risk profile. 

If you’ve ever wished you could get in on an exciting stock but found the share price too steep, you might want to consider fractional shares. Investing can be accessible when you take it one slice at a time.

The post What Are Fractional Shares? appeared first on Stash Learn.

Additionally, ETFs can help you gain broad investment exposure and develop a more diversified portfolio, which can be especially helpful for beginner investors. Ready to learn how to invest in ETFs? Read on for four simple steps that will get you started.

In this article, we’ll cover:

1. Opening an investment account
2. Researching ETFs
3. Purchasing ETFs
4. Regularly investing

Step 1. Open an investment account

Just like investing in stocks and other securities, you can’t buy ETFs directly on the stock market; you’re required to open a brokerage account. A brokerage account is a taxable investment account you use to buy and sell securities, including ETFs, through a licensed brokerage firm. You deposit funds into your account, and your brokerage uses that money to buy and sell the securities you select on your behalf. 

As an investor, you decide how involved you want to be in managing your brokerage account. More experienced, hands-on investors may want to take a DIY approach. If you’re a beginner or don’t want to devote large amounts of time to managing your portfolio by yourself, you may elect to have a financial advisor or the brokerage’s robo-advisor take on the management for you. Regardless of the method you choose, you can specify your risk tolerance, investing time horizon, and long-term goals to customize your investing experience. 

Opening a brokerage account online is relatively simple. Be prepared to share personal information like your name, social security number, date of birth, contact information, forms of identification, and financial status when you open your investment account. Once your account is open, you’ll deposit money and select whatever stocks, funds, or other securities you’d like to buy.

What to look for in a brokerage

There are several factors to consider when you’re looking for the right brokerage to meet your needs:

• Management options: Whether you opt for a traditional brokerage firm or an online or app-based brokerage, look for one that offers the level of guidance and management you need.
  
• Convenience: If easy access to your account is important to you, consider that online brokers allow you to access your information and submit transaction requests from your computer or phone 24/7, while traditional brokerages may not.
  
• Investing options: Ensure that your brokerage offers the kind of securities you want to buy, like ETFs, mutual funds, stocks, bonds, commodities, or even cryptocurrency.
  
• Fees: Additionally, consider how much you’re willing to pay in fees. Nearly all brokerages charge fees, but they vary considerably.
  
• Balance requirements: Finally, take a look at the brokerage’s balance and minimum deposit requirements to ensure they line up with your budget.

Get Started

Step 2. Research ETFs to buy

Once you’ve opened your brokerage account, it’s time to research which ETFs you want to purchase. As you explore, keep in mind your investment objectives so you can choose the one that best supports your investment goals, risk tolerance, and personal interests. Research each fund’s holdings and its track record of performance over time. If you’re investing in a market or sector ETF, decide which index you want to track, whether it’s the S&P 500, the Dow, or something else. Also, consider the costs and operating expense ratios of the funds you’re considering. 

In addition to deciding which ETFs to purchase shares of, you’ll want to decide how many to invest in. While that number depends on your budget and investment strategy, financial experts generally recommend keeping up to 10 ETFs in your portfolio. If your brokerage offers fractional shares, you may be able to put money into multiple ETFs even if you don’t have a large sum of money to invest at the beginning. 

Types of ETFs you can invest in

The world of ETFs is vast, and there are lots of types to investigate. The number of ETFs available in the United States has grown steadily over the last twenty years, with more than 2,600 available today. Most have a particular focus or objective, like matching the performance of an index, investing in specific sectors, or implementing a specific investment strategy.

ETFs can be passively or actively managed. Passive ETFs generally follow a buy-and-hold investing strategy that tracks a benchmark; many of the funds listed below are usually considered passive ETFs. Active ETFs, on the other hand, have a manager making decisions about portfolio allocation and, if they track an index, they may deviate from it based on the fund management’s strategy.

• Market ETFs: Also called equity funds, these ETFs could be lower risk since they try to accurately reproduce the performance of a specific index.

• Sector ETFs: These funds aim to match the overall performance of an index, like Market ETFs, but sector ETFs focus on a specific sector or industry.

• Thematic ETFs: These funds target a subset of a sector, so they’re even more narrowly focused than sector ETFs.

• Bond ETFs: Also called fixed-income ETFs, these funds invest exclusively in bonds. They’re often considered lower risk since bonds tend to be less volatile than stocks.

• Commodity ETFs: Some commodity ETFs actually purchase commodities, like gold, oil, and agricultural goods, while others invest in companies that produce or handle those commodities. 

• Foreign market ETFs: These funds attempt to mirror a non-US index, like Japan’s Nikkei Index.

• Currency ETFs: Also called foreign currency ETFs, these funds track the relative value of one or more currencies. 

• Inverse ETFs: These funds require active management, as they’re designed to increase in price when a given market index declines in price and can be relatively high-risk. 

• Leveraged ETFs: These funds follow a risky investment strategy that uses borrowed funds to buy options and futures to increase the impact of price movements.

Step 3. Purchase your chosen ETFs

You’ve done the research, and now it’s time to make your ETF purchase through your brokerage. If you’re using an online brokerage or app, start by searching for the ETF you’ve chosen by entering its stock ticker symbol. You may be able to purchase directly from the ETF’s entry if you’re using your brokerage’s research tools. Select your ETF and enter the number of shares you wish to purchase. Then submit and confirm your order. Congratulations, you’ve just purchased your first ETF.

Step 4. Set up a regular investing schedule

Once you’ve made your first investment, it’s important to set up a regular investing schedule. When you take a dollar-cost averaging approach today, you may be more likely to build wealth over the long term. Whether monthly, weekly, or quarterly, set up a regular transfer from your bank account to your investment account so that investing becomes a habit. Maintaining a regular investing schedule could help you mitigate the risk of mistiming the market, diversify the average cost of shares over time, and reduce the potential stress of investing. 

Invest in ETFs with a diverse and defensive strategy

Beginner investors may find that ETFs are a useful way to build diversity into their portfolios as they’re learning how to start investing. Investing in ETFs can be a relatively easy and flexible way to start diversifying your portfolio. With more than 90 ETF options available, plus the option for fractional shares, Stash can help you get started.

Investing made easy.

Start today with any dollar amount.

Get Started

The post How to Invest in ETFs: A Beginner’s Guide appeared first on Stash Learn.

• Stocks
• Bonds
• Funds

Stocks and bonds frequently form the building blocks of portfolio and investment strategy. Because they tend to perform differently under different market conditions, investors can use this variance to help meet their investment goals. 

Forms of investment

Here’s an overview of these different types of investments, where and how to invest in them, and the part they can play in your portfolio.

Stocks

Purchasing a stock means buying a small piece of ownership, or a share, in a company. Stocks are bought and sold on stock exchanges. Generally speaking, stock prices rise and fall based on investor demand. Most of the time, the more people want to purchase a particular stock, the higher the price is likely to be. When fewer people want that stock, the price may drop.

You can potentially make money on stocks by selling your shares at a higher price than you paid for them. But stock prices can be volatile, meaning they may rise and fall quickly. Investor demand and stock prices fluctuate for any number of reasons. For example, good news, such as strong sales numbers or the unveiling of a popular new product, could cause stock prices to rise. Bad news, like product safety issues or poor revenue numbers, could cause stock prices to fall.  After prices fall, it can take a while for them to recover. That’s one of the reasons stocks are often held as a long-term form of investment.

Not all successful investment strategies involve holding stocks for long periods, however. More sophisticated investors, such as hedge funds, might use different types of investment strategies designed to generate returns over the short term, such as shorting a stock. Investors using this strategy start by borrowing stocks, then selling them quickly in the hope they can buy them back later at a lower price. If they can, they return the stocks to their original owner and keep the difference in price as profit.

Other sophisticated strategies include using stock options, which are contracts that allow investors to buy or sell a given stock at a set price and time. Options allow investors to bet markets will rise and offer some downside protection. For example, if you buy an option for $20 a share and prices go up to $30, you can use your option to buy shares at the lower price before selling at the higher price. If you buy the same option for $20 per share and stock prices fall, you’re under no obligation to use the option to buy.

You may also get a return on your investment through dividends, which are a share of the company’s profits. Companies typically face a choice between spending their earnings to research and develop new products or distributing them to shareholders as dividends. Many established companies with predictable revenues and expenses choose to divide a portion of their earnings among investors as a regular cash dividend during the year.

Dividends can also make stocks more attractive to investors, as consistent dividend payments are a sign of consistent profits. Since share prices generally rise when stocks become more attractive, dividends can amplify returns in two ways: by paying investors in cash and by increasing stock prices and returns over time.

Bonds

Bonds are interest-bearing securities issued by companies or governments. Investors can purchase them for a set amount of time, known as a bond term. Bonds are a form of debt that the issuer takes out, similar to a loan; in this case, you are “loaning” the issuer money when you purchase the bond. In exchange for this loan, the company or government promises to pay you interest and repay the original amount of the loan when the term is up. Generally speaking, interest is paid regularly in the form of a “coupon.”

Bonds have three basic components: 

• The price at which you buy them
• The interest rate that’s used to calculate your coupon 
• The yield, or return an investor receives between the time they purchase the bond and the end of the loan term 

The interest rate stays the same throughout the life of the bond, while the bond’s price will usually change based on the movement of interest rates in the economy.

Those price changes happen because bonds become more or less attractive to other investors based on a combination of current interest rates and the return another investor could get buying a new bond. When interest rates go down, older bonds that pay higher coupons may become more appealing, which can drive their price up.

The opposite happens when interest rates go up: The price of older bonds that pay lower coupons generally goes down. It’s important to remember that in either case, the interest rate you get paid for holding the bond remains the same.

Stocks vs. bonds: risks and returns 

Over the long term, stocks may offer higher returns than bonds. Since 1926, stocks from large companies have returned an average of 10% per year. For 2020 and going forward, however, the projected compound return for large U.S stocks is forecast to be about 4%. But because stock prices can be volatile, they are usually considered a more risky form of investment than bonds. Unless the bond issuer defaults, you’ll receive a fixed return over the life of the bond, in addition to having your principal repaid. That’s one reason bonds are also called fixed-income investments.

The lower risk associated with bonds often translates into lower long-term returns compared to stocks. Government bonds, which are backed by the United States Treasury, have returned between 5% and 6% since 1926. Bonds issued by private companies, or corporate bonds, range in quality based on the likelihood that their issuer will be able to make timely payments. In most cases, the highest-quality corporate bonds pay more interest than government bonds, even though large, established blue-chip companies are unlikely to default on their payments.

On the other end of the spectrum, companies with a shakier track record and a higher risk of default tend to issue bonds with much higher interest rates. While these so-called junk or high-yield bonds offer investors a better return, the chances that investors actually receive all their payments are substantially lower.

Building a portfolio of stocks and bonds

While you can buy a single stock or bond, many investors choose different types of investment vehicles that help them build a more varied portfolio. This strategy is called diversification: a form of investment that helps investors spread the risk of poor performance among multiple securities. That way, if a particular business or industry runs into trouble, other more successful businesses or industries can help balance out your returns. Investment products such as mutual funds, exchange-traded funds (ETFs), and index funds offer investors opportunities to buy a range of stocks, bonds, or a mix of both. 

Different types of investment vehicles 

Mutual funds

A mutual fund consists of a basket of investments chosen by fund managers. When you buy a share in a mutual fund, you buy a share of the portfolio. Buying a share of the portfolio means you’re buying a fraction of a share from each of the stocks and/or bonds the fund holds. 

Mutual fund prices are determined at the end of the trading day and depend on the total price of all the assets in the fund’s portfolio. At the end of each day, mutual funds calculate their per-share price, or net asset value. The total value of the portfolio is divided by the number of outstanding shares held by investors. That calculation provides the price at which shareholders can buy or sell.

Exchange-traded funds (ETFs)

ETFs are a form of investment similar to mutual funds. Both hold a basket of investments, and owning a share equates to owning a fraction of a share of each of the stocks and/or bonds the fund holds. However, shares of ETFs trade on exchanges all day long, just like individual stocks. As a result, the price of a share in an ETF can fluctuate throughout the day based on stock market demand.

Index funds

The investment professionals who build mutual funds and ETFs usually have a strategy in mind. Often, that means investing in a variety of stocks or bonds with similar traits, such as large companies, small companies, or companies from a certain industry or a particular part of the world. Index funds are a type of mutual fund or ETF that matches the companies making up a major stock or bond index, such as the S&P 500, the Dow Jones Industrial Average, or the Bloomberg Barclays Aggregate Bond Index. These funds aren’t actively managed by investment professionals. Consequently, buying shares of these funds tends to have lower costs than actively managed mutual funds or ETFs.

How to get started with different types of investments

Whether you’re looking to invest in stocks, bonds, or funds, you generally need to open a brokerage account or another specialized account like a 401(k) or an IRA. You can also purchase government bonds online directly from the U.S. Treasury.

Your goals will help you determine the different types of investment options you choose. Brokerage accounts can be good for short-term investment goals, since they provide relatively easy access to your money. Retirement accounts may be advantageous for long-term goals, since they don’t allow easy withdrawals. 

Stash has boiled down its investing philosophy into the Stash Way, which includes leveraging various forms of investment for a diverse portfolio, investing regularly, and investing for the long term.

The post What are the different types of investments? appeared first on Stash Learn.

What is an index?

Like the index in a recipe book, an index in the stock market is a list. But instead of recipes, it lists securities. And rather than helping you find terms in a book, it helps experts measure the market’s behavior.

What is “the market”?

The phrase “the market” gets tossed around a lot, often without much context. Let’s break down what it means. 

A stock market is a generic term for a physical location, like the New York Stock Exchange (NYSE), an electronic exchange like the Nasdaq, or any other mechanism to buy and sell securities, such as stocks, bonds, funds, and other investments.

The NYSE and the Nasdaq are the largest stock exchanges in the U.S., but there are many other stock exchanges in the country and all over the world. 

“The market” or “the stock market,” isn’t just one thing or one place. When people talk about the market, they often mean stock markets generally or a subset of stock markets, like U.S. stock markets. 

There are many stock markets, trading the stock of thousands of companies, some of which might have millions of shares. That means understanding and measuring the market can be a daunting endeavor. Stock indexes can help.

What’s an index for the stock market?

Because the market is so large and complex, it’s nearly impossible to measure the behavior of the whole thing. Indexes help solve that problem by looking at representative pieces of the market.

An index, in the stock market world, is a list of securities intended to represent the market, either as a whole or a subset of the market. Using a limited group of securities as a proxy for the market addresses the logistical challenges of measuring the entire market. And if the index is reliable, it can be used to understand the market more broadly.

Who creates indexes?

Anyone can create an index. But selecting representative securities, plus tracking, analyzing, and communicating about their behavior, is a highly specialized task. Thus, the reputation of the index provider determines how much weight the index carries with investors and experts.

These are some of the most important and referenced indexes in the financial world. If you remember any indexes, it should include these:

• S&P 500
• Dow Jones Industrial Average
• NASDAQ Composite
• Russell 3000

What kinds of indexes exist?

There are many indexes in the stock market landscape, and each has its own goal. For example, perhaps the most well-known and referenced index is the S&P 500. It’s a list of 500 large companies traded on the NYSE and Nasdaq, representing over 80% of the available market capitalization. It aims to give investors a window on the market overall.

The S&P 500 is not industry-specific. It includes companies such as 3M, Ford, and  Apple. It’s also not exchange specific; for example, Apple trades on the Nasdaq and 3M trades on the NYSE. Instead, its primary requirements for inclusion are size and trade volume.

Other indexes track sectors of the market, like technology, or industries, such as clean energy, aerospace, or fossil fuels. Some indexes may even focus on companies in the cannabis industry or companies working on artificial intelligence technologies.

Putting indexes to work with Stash

So how do you know what indexes to follow? It depends on your investment strategy. You may want to pay attention to what’s in an index. In the stock market, there are a tremendous number of companies and sectors, so consider focusing on indexes that contain securities most relevant to your portfolio. That can help you understand how your investments could behave in the future. And following big-picture indexes can be a way to grasp what’s going on with financial markets in general and give you insight to support a long-term investing strategy. 

The post What Is an Index in the Stock Market? appeared first on Stash Learn.

It is never too late to start investing, and it is certainly never too early. 

The market often presents an opportunity to invest and it is exciting to watch how it moves and how the companies you have selected perform. Especially in times of volatility, when the stock market moves all over the place, there is a tendency to follow social media investing ideas for comfort. There is also a resurgence in day trading, people who speculate. They make bets on where they think the stock market is going during the day, therefore they move in and out of their stock positions in efforts to make quick returns. 

This is not the Stash Way, our investing philosophy that emphasizes regular investing over the long term.  Remember what they say, “Good things come to those who wait.” As you start thinking about your financial future, Stash wants to guide you every step of the way. 

Here’s how.

How we choose investments

First off, Stash is a fiduciary. This means that Stash is always looking out for your best interest as we provide you with investment options. As a fiduciary, we do our best to help guide you to make the best investment decisions possible. That explains why some of the investments you’re looking for may not be available on the Stash App.

Our Investment Committee here at Stash prescreens investments before adding them to the platform. We look for certain qualities in the investments in an effort to lower some of the potential risks that you may experience in the market and to help you diversify your portfolio. 

To name a few, we review qualities such as the market capitalization, trading volume, and more to assess the risk of stocks. For exchange traded funds (ETFs), we review the investment strategy, underlying exposure of the fund, assets under management, expense ratio, volatility, and much more. Think of it as going to the grocery store to buy apples. You examine the exterior of the apple to lessen the risk that the inside of the apple may be rotten. This is what the Investment Committee aims to do, and this is why you may not see some names on the Stash App.

The Stash Way

Although it may be tempting to find names that have that quick moment of satisfaction seeing the price jump rapidly, it may be possible that just as quickly as you see the stock price go up, it may go down. Think of the volatility from past crises such as the Dotcom Bubble, the 2008 Financial Crisis, and the 2020 Pandemic. Don’t attempt to time the market, but try to maximize your time in the market.

As you invest, always remember our investing philosophy, the Stash Way. Think long- term, invest regularly, and diversify. Historically, we’ve seen the market move up and down however the trend is always upwards. If you think of what happens in the long-term, you will understand to not react to any short-term volatility. Stay the course and allow the power of compounding to help you grow your investments. Invest regularly to remove the emotional aspect of trying to time the market and having to think about when is a good time to invest. It allows you to subconsciously build the habit of investing for your financial future. Lastly, it is important to diversify. Don’t expose your financial well-being to volatility by putting all your money into one stock. Spread your money in different companies, industries, different investment vehicles such as ETFs, and asset classes to avoid the risk of putting all your eggs in one basket. 

Remember, all investing involves risk, and you can always lose money on your investments. Understand your financial situation and investment objectives before investing. Stash is here to help you make educated decisions to help you make financial progress. 

The post How Stash Chooses Its Stocks and Funds appeared first on Stash Learn.

But how, exactly, investing pays is something of a mystery to many investors. For some people, the idea that you can stash money away in an account or security and that it could grow into more money seems at best, like magic and at worst, suspicious.

We all know people that have made money “investing”. But what they actually did (and where they figured out how to do it) can seem like a Mulder and Scully-level mystery.

So how does your money actually make money?

While almost everyone invests their money with the goal of turning a profit, investing involves risk.

Markets can be volatile and investors need a sound strategy to weather the ups and downs over the long term.

That said, over the long run, though, markets (and returns) trend up:

Disclosure: This is not a prediction or projection of performance of an investment or investment strategy. Past performance is no guarantee of future results. Any historical returns, expected returns or probability projections are hypothetical in nature and may not reflect actual future performance. The rate of return on investments can vary widely over time, especially for long term investments including the potential loss of principal. For example, the S&P 500® for the 10 years ending 1/1/2014, had an annual compounded rate of return of 8.06%, including reinvestment of dividends (source: www.standardandpoors.com). Since 1970, the highest 12-month return was 61% (June 1982 through June 1983). The lowest 12-month return was -43% (March 2008 to March 2009). The S&P 500® is an index of 500 stocks seen as a leading indicator of U.S. equities and a reflection of the performance of the large cap universe, made up of companies selected by economists. The S&P 500 is a market value weighted index and one of the common benchmarks for the U.S. stock market. Source: Yahoo Finance. Source: Yahoo Finance.

The Dow Jones Industrial Average, for example, saw big gains over the past two or three decades. After the market bottomed-out during the financial crisis in 2009, the Dow more than doubled, briefly topping out above 29,000 points in early 2020.

Here are the three primary ways that companies pay back their shareholders, or, by which investments can earn you money.

1. An increase in share value

Perhaps the most obvious way in which an investment can make you money is that it gains value. As stock prices rise, shares become more valuable. And if you’re a shareholder, you can sell your stocks, earning you a profit, or return, on your initial investment.

The same applies to bonds, exchange-traded funds (ETFs), and other investments. When a company’s shares are worth more, shareholders reap the benefits.

2. Dividends

A dividend is your cut of a company’s earnings. If you own shares in a company, you own a part of the company — and therefore, you get a cut of the profits.

Typically, dividends are cash payouts to shareholders which can be reinvested, or sent to your accounts t through a dividend reinvestment plan (DRIP). With Stash, you can turn on DRIP and have dividends automatically reinvested. They can, however, be issued in the form of additional shares.

3. Interest payments

Interest payments are generally associated with fixed-income securities, like bonds. Bonds are a form of debt, meaning that you’ve loaned a company your money. In exchange, a bondholder is due interest payments and the bond’s full amount upon maturity.

If you’re a bondholder, then, you can expect periodic interest payments.

A quick note about stock buybacks

Sometimes, companies will engage in stock buybacks, which is when a company buys its own stock on the market. There are a few reasons why a company might do this, but one of the most common is to consolidate stakeholder value, and to increase share prices.

While somewhat controversial, a stock buyback is another way that companies can effectively “pay back” their shareholders.

The post How Your Investments Earn You Money appeared first on Stash Learn.

The House Judiciary Committee passed a bill on Wednesday, November 20 that could lead to marijuana becoming legal on the federal level. The bill now heads to the full House for a vote.

Although several states currently allow recreational use of marijuana—also known as cannabis—and the majority of states have approved its use for medical purposes, marijuana is classified federally as a Schedule I controlled substance, lumped together with outlawed drugs such as LSD, heroin, and peyote.

This marks the first time a cannabis legalization bill has ever passed a congressional committee. While the bill may pass the full House, it’s unlikely to pass in the Senate, according to reports.

What does the bill say?

Although the bill could make cannabis legal nationally, it reportedly leaves specific policy around legalization to the individual states, including how they want to enact the law, and how to clear the records of people convicted of low-level offenses related to pot possession. The bill would also impose a 5% sales tax on marijuana that would be used to support communities most affected by current laws outlawing marijuana.

The bill moves next to the Democrat-controlled House, where passage is likely, according to some experts. (In September, the House passed another bill that would allow cannabis producing-companies to access banks, which they currently can’t do.)

The fate of the legislation seems less certain once it moves to the Senate, which is controlled by Republicans who for the most part don’t favor legalizing marijuana. Senate Majority Leader Mitch McConnell, for example, is generally opposed to federal legislation legalizing cannabis.

More about Marijuana

Marijuana is legal for recreational use in 11 states, and 33 states have laws that make it legal for medical purposes.

Two-thirds of U.S. citizens support the legalization of marijuana, according to recent research by the Pew Research Center.

The marijuana industry is expected to add 200,000 new jobs in the U.S. by 2020, according to New Frontier Data, which provides research on the cannabis market.

Growth is expected for a long list of businesses, such as the cultivators and packagers of the plants, dispensaries for medical and recreational weed, not to mention companies creating products that use cannabis byproducts called CBDs. CBDs are non-pyscho-active derivatives of cannabis, which can be used for a variety of purposes, including helping with inflammation, chronic pain, and depression.

Companies are also capitalizing on industrial uses for cannabis, including the production of hemp, which can be used to make fabrics and textiles, as well as being used as additives to health food and body care products.

And it all makes for big business. Total legal sales of cannabis were about $10 billion in 2017, and are expected to grow to $24.5 billion by 2021, according to reports.

The post Why Marijuana Just Took a Step Closer to Legalization appeared first on Stash Learn.

And if you’ve invested in the stock market, or are thinking about it, it’s important to pay attention. Publicly traded companies are required to file something called an earnings report every quarter. Earnings season is one of the best ways to get current information about companies whose stock you own, or are thinking of purchasing.

Although key indexes such as the Dow Jones Industrial Average and the S&P 500 are at or near record levels, experts are concerned that the trade war with China, as well as slowing economic growth nationally and globally, could result in lower earnings this quarter.  In fact, two-thirds of companies that issue earnings estimates have reportedly issued negative forecasts—meaning their revenue and earnings growth are likely to be lower than they expected.

Who is reporting?

More than a thousand companies are reporting—including in the financial services, health care, real estate, and technology sectors. Already,  big banks including Citibank, JPMorgan Chase, PNC Bank, U.S. Bancorp, and Wells Fargo have filed earnings reports. A number of consumer companies, including Alkaline Water Co., Domino’s, Johnson & Johnson, and Levi Strauss, as well as some of the largest U.S. airlines, have also reported their most recent financial results.

What’s a quarter?

Simply put, a quarter is a way to divide up the year, most often for financial accounting purposes.

A quarter happens every three months. According to a standard calendar year—one that begins on January 1 and ends December 31—the first quarter ends on March 31. The second quarter ends on June 30. The third quarter ends on September 30, and the fourth quarter ends on December 31. But companies can, and often do, divide up their years into quarters that follow something called a fiscal year, for accounting or other purposes. In that case, they can structure their quarters to end in any three month period.

What are earnings again?

Earnings are an accounting of how much a company has made or lost during a quarter, or for the year. Plenty of things go into an earnings report. Among them are an accounting of sales, revenue, earnings per share, losses, acquisitions of other companies, and other critical financial information. You can learn more about earnings reports here.

How can I find out more about company earnings?

Earnings are public, and companies file their reports every quarter with the Securities and Exchange Commission (SEC). The SEC even has a website called EDGAR,  where you can search on any publicly traded company and read its quarterly earnings reports. Quarterly earnings reports are called 10-Qs.

The post Why You Should Pay Attention to Second Quarter Earnings appeared first on Stash Learn.

But if you do sell, you’ll be locking in your losses. Here’s an explanation of what that means:

• You initially buy stocks, bonds, and exchange-traded funds (ETFs) at a predetermined share price.
• That price fluctuates on a daily basis, based on what’s going on in the market. That means the price can increase or decrease in value.
• If it increases, you have a gain. If it decreases, that means you have a loss.

What are losses?

Here’s a simple example:

Let’s say you bought $10 worth of shares in an Investment*  on Stash. If the value of those shares increase to $15, you have an unrealized gain of $5. If that same value decreases to $3, you have an unrealized loss of $7.

By buying and holding onto your position, and even adding to it as stock prices go down, you have the potential for more gains over time

Understand, you have a loss on paper, in your account,  but it is not realized until you sell it.

There’s a temptation to sell when the markets go down because you’ve lost money in the short run. That temptation may be particularly strong if lots of other people are selling, and there seems to be a stampede for the exits on a particular stock or fund.

If you follow their example and sell, there is no chance you’ll ever make back the money you lost by selling.

Keep this in mind: When you invest in the market, you should establish a long-term horizon, generally for many years. If you’re investing for retirement, that time frame could easily be 30 years or more.

Buying, holding and investing for the long-term

By buying and holding onto your position, and even adding to it as stock prices go down, you have the potential for more gains over time.

Although it’s impossible to predict the future, if the past is any indication, an investment in a fund that tracks the S&P 500, an index made up of hundreds of the largest companies in the U.S., would have made an average 9.7% return per year* over the period 1928 through 2017 last eight decades.

Of course, that stretch of time contains some very bad years, including the Great Depression, and the more recent financial crisis of 2008. But if investors sell their stocks on the dips, they have no chance of earning back those losses over time.

Should you ever sell?

This is not to say you should never sell. When you own stocks in individual companies that lose money, you may want to consider selling, for example, if that company starts to have serious trouble meeting its earnings forecasts, or if the industry it’s in starts to deteriorate. Then it may make sense to get out.

There can be similar situations with funds, but they are different investments vehicles that tend to spread out risk by owning shares of numerous companies at once.

Some funds focus on specific sectors, for example, technology or retail, and those can tend to be more volatile, meaning their share price can be subject to wide and sudden swings in value. That’s because they focus on one area of the economy.

Others have a broader focus, and may, for instance, follow an index such as the S&P 500, with a large number of companies in numerous sectors.

In the end, you need to research any fund you’re thinking of buying and buy numerous kinds of funds that give you broad diversification in the market. That means you should aim for a variety of assets and asset classes, including stocks and bonds, in developed as well as developing countries. Remember that if you are uncomfortable with the volatility of your portfolio at any given point in time, there’s no need to panic and you have an easy way to reduce risk. You can buy more bonds to smooth out the ups and downs in your returns over time.

Finally, establish a long-term investment strategy that keeps you in the market.

The post Look Before You Sell, Don’t Lock in Your Losses appeared first on Stash Learn.

What you need to know:

• The $4 billion investment raises Constellation’s ownership stake in Canopy to 38%, with the option to increase it to 50% within the next three years.
• Canopy is the first and largest cannabis company to trade on the New York Stock Exchange.
• A large investment in the cannabis industry from a big business like Constellation might signal that marijuana is officially entering the mainstream.
• “Through this investment, we are selecting Canopy Growth as our exclusive global cannabis partner,” Constellation Brands CEO Rob Sands said in a statement.

More details:

Marijuana is becoming a mainstream commodity, and with relatively few big businesses willing to wade into the cannabis market thus far, Constellation’s move is a big indicator that the corporate world sees it as a promising market.

Likewise, governments are getting on board, too. Several U.S. states have legalized marijuana, and Canada will fully legalize cannabis later this year, becoming the second country in the world, after Uruguay, to do so.

Constellation’s move will make a splash, but it’s not the first company in the alcohol industry to wade into the cannabis industry. Molson Coors is also looking at the cannabis industry as a potential source of growth as beer sales have slowed. The company inked a deal with marijuana company Hydropothecary Corp. to create marijuana drinks in early August, and another beer company, Heineken, is also working on THC-infused brews through its Lagunitas brand.

The post Beer Maker Bets $3.8 Billion on Big Marijuana appeared first on Stash Learn.

Here’s what you may not have known: Many of the strategies you use to create your dream fantasy football team are useful for first-time investors.

The best thing about creating a portfolio is that you don’t have to bite your nails through a draft or hurry home to make your picks. And unlike fantasy football, you can invest any time and make decisions when you’re ready.

Here are a few ways that fantasy football can teach you about investing:

Diversify your roster

Your roster is sort of like your portfolio. A roster is the list of all your players. A portfolio holds all your investments.

Just like you wouldn’t want to put all your hopes on a superstar quarterback and fill the rest of your team with bench warmers, you wouldn’t want just one trendy, overly-touted stock in your portfolio. If that stock gets hit, your portfolio will feel the pain. Same thing for your roster if your quarterback tears his ACL.

This is where diversification comes in.

You want a variety of players from different teams with different skills that can pick up the slack if one of your best players is a bust. The same is true for your investment portfolio. 

In short: A diversified roster will make sure your team keeps moving in the case of a setback. A diversified portfolio will balance out your risk in case one sector or company fumbles.

Don’t have a home bias

Do you pledge allegiance to the NFC South? If so, you may be likely to fill your roster with Falcons, Panthers, and Buccaneers.

Pats, Giants, and Bills? No way.

Does this sound like you? Then you have, in investment terms, home bias. And that can limit the potential of your roster. Your bias toward Southern teams keeps you from harnessing the talent of players from other teams. Especially if your players are used to playing in the heat but choke when faced with frigid weather.

In the investment world, home bias means that you have a propensity to invest most or all of your money in equities (that’s stocks) from American companies. Home bias can keep you from realizing gains from international equities, which can balance out your portfolio.

If the U.S. stock market hits a stumbling block due to political strife or sudden sell-off, your international holdings may hold steady. After all, the Japanese market may not be reacting to the same things our markets do.

Don’t overreact to Fantasy Football chatter

The rumor mill is always swirling. ESPN says your breakout running back looked like he was limping after last night’s game. Bleacher Report says that a coach is thinking about keeping your best wide receiver on the bench. TMZ says your quarterback is now dating an Instagram star. Sports commentators and columnists are paid to make hay out of speculation to keep you on the edge of your couch. But that doesn’t mean you should trade your best players because of rumors.

The same is true for investing.

Tech sites and market analysts are quick to point out each company’s misstep. But listening to every bit of news and chatter can keep you from looking at the big picture or the overall health of the company. Just like your RB may have just had a pebble in his shoe, a crummy quarter may not indicate that you’ve made a bad investment.

Don’t be guided by emotion

Sometimes, a bad day at the office can coincide with a player’s bad night on the field. It happens. Your frustrations at work can spill over onto your roster. When your best quarterback throws two interceptions in a row, you may decide he’s more trouble than he’s worth.

So you trade him.

Then he proceeds to have the best season of his career. And you kick yourself because you let emotions guide your decisions.

Emotions can also lead you to make rash investment decisions. A sudden feeling of panic about your job can make you feel uneasy about your finances. So you sell your investments because you want to see more cash in your checking account. But then the market goes up and you’ve locked in your losses. You would have been better off holding on to your investments and not let your fleeting feelings of worry get in the way of your financial strategy.

Looking for investments to lead you to the Super Bowl?

Check out the ETFs and stocks available on Stash.

The post How Fantasy Football Can Teach You About Investing appeared first on Stash Learn.

Dig deeper: Now That’s What I Call an Investment! ETFs explained

What’s an ETF?

ETFs, or exchange-traded funds, are a basket of investments bundled into a fund and sold on an exchange. And they’re becoming the investment of choice for more and more people, according to a recent study:

• 60% of millennial investors plan to increase their investments in ETFs in the next year.
• 56% of millennials who have invested in ETFs say they are their “primary investment vehicle.”
• That’s up from 28% in 2016.

Why are ETFs blowing up?

ETFs offer investors exposure to a wider, more diversified slice of the market than they get with single stocks, and typically at a lower price than many mutual funds. They also tend to have lower associated fees and can be traded just like stocks.

On the other hand, investing in ETFs can limit your investment choices to larger companies, dividends could be limited, and higher trading costs for certain funds.

Read more: What’s the Difference Between a Stock and a Fund?

Investing in ETFs on Stash

Stash offers ETFs with themes like technology, healthcare, AI, aerospace and defense, and more. Invest in the future you want.

The post The Simple Reason Many Young Investors Love ETFs appeared first on Stash Learn.

Like what you’re hearing? Leave us a review on Apple Podcasts (or wherever you listen to your favorite podcasts).

We’re getting back to basics. We’re talking funds, diversification, and all things that can go into your portfolio.

In this episode, we talk about mutual funds, index funds, exchange-traded funds (ETFs). What do those terms even mean?

If you’re new to all this, relax. Our very own senior financial writer Jeremy Quittner is here to explain it all. We also tackle active vs. passive management, expense ratio, and why you never want to put all your eggs in one basket.

Don’t have Stash yet?

The post Podcast: Learn About Funds and Diversification with Jeremy Quittner appeared first on Stash Learn.

What’s an expense ratio?

There are costs associated with owning shares of a fund (ETFs, index funds, mutual funds, etc.), and those costs are levied in the form of annual fees called expense ratios.

An expense ratio is an annual fee charged by investment fund managers, and paid by shareholders of a fund.

The fee covers management fees, administrative expenses and other costs incurred to operate the fund. These costs are built into the price of the fund, not charged separately. You won’t get a separate bill for management costs, in other words.

In a nutshell, the fund manager incurs costs to operate a fund, and the expense ratio covers those costs.

It’s calculated by dividing a fund’s operating expenses by the average value of the fund’s assets. Here’s the formula:

How do you pay it?

Again, these fees are charged to shareholders daily through small deductions to a fund’s assets, and are used by fund managers to cover management and administrative costs incurred to operate the fund.

They’re also not separate fees–instead, they’re included in the price of the fund, making them different from commissions or brokerage fees charged to actually purchase shares.

You’ll find a fund’s expense ratio listed in its prospectus.

How much are the fees?

Generally, you should look for expense ratios that are less than 1%. They vary from fund to fund, and from fund manager to fund manager.

For ETFs, the average expense ratio is 0.23%, according to industry data.

The average expense ratio for a mutual fund was 0.63% in 2016, according to industry data. For historical context, the average was 0.99% in 2000, meaning that the costs of owning shares has decreased in recent years.

The post What’s Expense Ratio? Get Smart About Fees appeared first on Stash Learn.