Stock Market Trading
Index Shares (ETFs)
The indexes are attractive for trading to many investors. One of the main reasons why many investors prefer to have indexes in their portfolio is to avoid doing a fundamental analysis.
The process of building a portfolio typically involves time consuming fundamental analysis in which an investor must wade through hundreds of stocks in order to select the one that will fit the desired criterias. An analysis of the industry also must be done, as well as an analysis of the entire economy (entire stock market). If an investor is looking for 40 stocks in his/her portfolio, all of the above must be done 40 times. After that, an investor must monitor the selected stock, the industry sector and the entire economy constantly. In the end, there is no guarantee that some critical piece of information will not have been missed or that some company's information will not have been released in time, or that something else may have happened that is beyond an investor's control.
When it comes to investing into indexes, fundamental analysis can be avoided. This work is done by a company that tracks an index. This is NASDAQ OMX Group for NASDAQ indexes, Standard & Poors for S&P indexes, and the Wall Street Journal for Dow indexes, etc. As a result, index shares (Exchange Traded Funds that track performance of the indexes) have become the most popular investing vehicle in the world. With index shares, traders may focus on technical analysis only, which is much easier, more affordable and less time consuming.
When a trader buys QQQ shares (NASDAQ 100 tracking stock), he/she purchases equivalent pieces of ownership in 100 companies that are listed in the NASDAQ 100 index. If buying SPY shares (S&P 500 tracking stock), a trader invests in 500 companies that are listed in the S&P 500 index. By buying DIA shares (DJI tracking stock), a trader invests in 30 companies that are listed in the Dow Jones Industrial index. With a purchase of IWM shares, an investor diversifies his/her portfolio among the 2000 companies that are listed in the Russell 2000 index.
Index shares (ETFs) are relatively young investment tools. SPDRs (SPY) were introduced in 1993, DIA in 1998, and QQQQ in 1999. Yet, in just a couple of years after their inception, these ETFs have become the most traded (by trading volume) shares in the world. The other advantages (besides the opportunity to focus on technical analysis and avoid fundamental analysis) are:
Exchange Traded Funds can be traded just like common shares of stocks;
- they are highly liquid;
- ETFs can be traded on margin and can be sold short;
- they have lower expenses than the regular funds;
- unlike the regular funds, they can be traded during the market's open hours;
- they pay dividends;
- one ETF's share diversifies a portfolio among all stocks listed in an index;
- there is no minimum required investment to trade ETFs;
- ETFs cannot file for bankruptcy.
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