ETF's (Simple diversification)
Diversification is one method in investing that is intended to minimize risk. When investing in the stock market it is generally considered best practice to invest in a diversified portfolio rather than just a few individual stocks. This is because if you invest in just a handful of stocks and one of the companies does very poorly then you can potentially lose a huge percentage of your total investment. If investing in a diversified portfolio if one or even a few companies perform very poorly your downside risk is limited since your exposure to those companies is minimal. One way to generate a diversified portfolio would be to individually pick many different stocks and invest in them one by one, tracking your investments over time and rebalancing as needed. This method can be rather labor intensive and can be overwhelming for new investors and investors that prefer to take more of a hands off approach.
An alternative method to generate a diversified portfolio is to invest in ETF's, which is shorthand for exchange traded funds. ETF's trade on the stock market like individual stocks except they differ in the fact that they actually represent a collection of many different stocks. Often an ETF will have a set of conditions that determines which companies they invest in. Some ETF's are actively managed and regularly change their holdings, while others are more constant and seldom change their holdings. Regardless of the type of ETF, when purchasing an ETF you are essentially investing in a collection of stocks. ETF's can make it very easy to diversify your investment portfolio since you can just choose a handful of ETF's to invest in and it would act similarly to a portfolio where you purchased a large set of stocks, except a portfolio of ETF's can be easier to manage and cheaper to access.
ETF's can be cheaper to access than purchasing individual stocks since the price to purchase one share of an ETF is generally much cheaper than if you were to purchase one share of each company the ETF represents. This allows you to get a diversified portfolio at a much cheaper entry point, making it a potentially appealing option for investors with less resources to invest.
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Hi, I am a current graduate student studying computational mathematics. I have an interest in investing and I invest as a hobby. This blog is intended to share my thoughts and experiences.