What is an ETF?

An ETF is basically something that doesn’t exist, except on paper. Think of it this way, you own a part of an idea. Have you ever received a flyer in the mail that invited you to go on a cruise? You will get to go along for the ride if you only set through a seminar that regales you to buy a part of a resort. It’s a package deal and that is a stepping stone for us to understand these things.

The term putting all your eggs in one basket is very true here. An ETF is basically a basket, the best way to explain it is that you have a container, and several companies of close to equal value pace there “wealth” inside be it stocks, gold, silver, oil ect.... you then can buy and sell these in large quantities.

These large blocks are known as creation units. The U.S. Securities and Exchange Commission explains it this way. Investors do not buy Creation Units with money. They are bought with securities that are close to the ETF. Buying these is usually done by large firms.

You are not investing in one company but a index of funds. This article by Yahoo explains it well:
“Exchange-Traded Funds, or ETFs, are index funds that trade just like stocks on
major stock exchanges. Want to invest in the market quickly and cheaply? ETFs
are the most practical vehicle. They help the investor focus on what is most
important, choice of asset classes.”

ETF’s trade instantly not like stocks where the price is set at the end of the day, they are becoming popular among many types of investors. ETF’s are handled by a market specialist, these are extremely qualified individuals that handle the baskets.

The index is then sent to a designated bank for safekeeping. Whenever the buyer retrives the ETF he/she can then sell it as they see fit. One thing that keeps them going is that each step along the way gets part of the income of the ETF.