ETF Investing: Where to start?
As a beginner to the world of ETFs, the first question in the mind of any Invest Diva/ Divo is:
Where the heck should I start?
As a self-taught ETF trader, I can assure you, asking your good friend Google won't give you a compelling answer.
Most articles or even books written on the matter are sponsored by large ETF companies who are racing to attract customers. As a seasoned teacher, I realized it is important to divide the prospect ETF traders into three categories:
1- Those who have never traded anything, ever
2- Those who know how to trade stocks or commodities
3- Forex Divas*
In this lesson I'll focus on absolute beginners to any type of trading. If you already have experience with any other kind of trading, feel free to skip to the next lesson.
ETF Investing for True Beginners
If you've never traded anything in your life, and have absolutely no clue how the financial market works,this lesson is for you. Here are must-know answers to frequently asked questions.
What is Trading?
In the simplest format, trading is exchanging something of value for another thing of value. You can "trade" your money for a popsicle, your best friend for you new boyfriend, or even your dollars for another type of money (i.e. currency trading.)
So in a sense, if you have ever bought anything, or participated in any form of exchange (including sexual exchange) you are essentially a trader.
The important takeaway from this is that all types of trading follow the exact same rule:
Supply & Demand
When we talk about trading in the financial markets, it is the same principle. Think of those noisy traders you see on financial news channels for example. What they are actually doing besides yelling at the camera, is buying shares (or a small part) of a company. If the value of those shares increases, then they make money by selling them again at a higher price. This is financial trading. You buy something for one price and sell it again for another — hopefully at a higher price, thus making a profit and vice versa.
How does increase in demand affect the value?
The answer is simple: the more demand there is for something, the more people are willing to pay for it, enabling the seller to ask for a higher price. So, the price will go up.
If you think about it, same thing happens in real life. The more demand there is for a bachelorette in Bachelor Nation, her "dating price" goes higher and the pursuers must come up with "higher value dating strategies" to win her over.
How does an increase in supply affect the value?
Now when you raise the number of bachelors and bachelorette and put a bunch together in Bachelor in Paradise, then we face an increase in supply.
In a farmer's market, let’s say suddenly a new farmer comes into the market and has even more tomatoes to sell. The supply of tomatoes has now increased dramatically. If the demand doesn't increase at the same pace, it stands to reason that the new farmer may want to sell tomatoes at a cheaper price than the first farmer to entice customers. It also stands to reason that the customers would probably want to buy at the lower price.*
Seeing this, the first farmer will most likely bring his/ her prices down. The sudden increase in supply has therefore brought the price of the tomatoes down.
The price at which demand matches supply is called the “market price”, i.e. the price level at which both the farmers and the customers agree on both a price and number of tomatoes sold.
*Of course, this is all linear theory, and in the real world, things can get more complicated than this. This theory assumes all customers will choose cheaper price over any other market factor such as quality. But every person is different and buyers have different values, creating specific market sentiment at a given time.
How do you trade an ETF?
Learning how to trade ETFs is quite easy. If you understood the meaning of trading explained above and the nature of ETFs explained in the previous lessons, you can start practicing trading ETFs almost instantly, as ETFs also follow the rules of supply and demand, and trade pretty much like stocks. You can trade them throughout the trading day, and you will be buying or selling an index (instead of a tomato.)I'll do a deeper comparison of stock trading and ETF trading in the next lesson.
How is trading different than investing?
Ah, here comes the million dollar question! Since you are learning with Invest Diva, it is important to learn what investing truly means. Here is the main different between the two:
An investment focuses on a long term growth of your wealth through buying and holding while trading involves more frequent buying and selling.
Both have their own pros and cons. However, if you are not a professional trader who enjoys sticking his/her nose to the screen all day, I recommend most Invest Diva students choose to become an investor (in anything) rather than a trader.
One final nugget of wisdom that just had to get out:
Invest in yourself. Invest your wealth. Repeat.