buy custom The Difference between ETF’s and Mutual Funds essay

buy custom The Difference between ETF’s and Mutual Funds essay Nowadays, there are numerous options which serve as a powerful and flexible tool to handle a variety of trading strategies. Among them, there is a choice between buying a mutual or an exchange-traded fund (ETF), which may influence the investors success and the amount of money they can make. Therefore, it is crucial to know the differences between ETFs and mutual funds as well as their nature. Mutual Fund A mutual fund is a portfolio of shares, carefully selected and acquired by professional financiers from numerous investors for the purpose of purchasing securities, including stocks, money market instruments, and bonds. The cost of the funds shares is equal to the total value of fund investments divided by the number of shares (U.S. Securities and Exchange Commission, n.d.). The main advantage for investors is the risk reduction because of the distribution of investments among a large number of different companies. Another advantage of mutual funds is the saving time as buying a share, people do not spend their time managing the investment. Furthermore, special finance managers work hard to make money, hence bringing a great profit to clients. Instead of independent persons analysis of industries and companies, professional managers analyze all factors and make an appropriate decision (ICI, 2007). This option is ideal for those who do not have either time, desire, or ability to engage in an analysis of the securities Moreover, due to countless transactions in mutual funds, the total amount of commission decreases significantly. If to compare the commission in mutual funds to the commission that a person would have paid by buying many shares independently, the difference will be obvious. When mutual fund collects a huge capital, then to produce a deal on a large scale, the transaction should costs cheaper, which is another advantage of mutual funds, especially for investors. Exchange-Traded Fund ETF is a type of funds, which presupposes hedging risks and investing in certain markets or individual sectors of the economy. It is a passive management strategy traded on public exchanges (U.S. Security and Exchange Commission, 2012). A purchase and sale of ETF do not differ from similar transactions with individual stocks. ETFs allow implementing an index investment strategy with minimal costs. The low cost and flexibility of the strategy are among the main advantages of ETFs for investors. Each ETF replicates the structure of one of the stock indices. Therefore, it allows traders to invest directly in the stock index of the leading stock exchanges of the world. In addition, ETFs may follow the structure of the bond, commodity, or currency indices. There is also ETF, which replicates the structure of regional or sectoral indices (Antoniewicz Heinrichs, 2014). Therefore, ETFs are a good tool for portfolio diversification. Main Differences The main difference between ETFs and the mutual funds is that ETFs trade only on the exchange that can be purchased through a broker. On the contrary, one can buy a share in mutual funds only from the company that manages these funds (Egan, 2014). Moreover, ETF not only combines all the advantages of mutual funds but also has a number of other significant strengths. For example, the procedure of selling and buying in ETFs is similar to that of a common stock. People can invest at any time when they have the opportunity, paying the price indicated at the moment of the purchase. Unlike EFTs, one can invest in a mutual fund only based on the prices established when the market closes (Egan, 2014). In addition, in EFTs, the management fees and the minimum contribution for investment is lower than that of the mutual funds (Egan, 2014). A person can trade ETF shares on margin or to buy the ETF option, which significantly expands the range of capabilities in building trading strategy. ETFs faithfully replicate the change in the price of stocks of the total market and the individual sectors, bonds, commodities, and other assets. Conclusion To summarize, it is worth saying that the main differences between the two options are the number of shares offered, the presence of a mediator in the form of a broker, affordability, and duration of the procedure of purchase. Buy custom The Difference between ETF’s and Mutual Funds essay