The Finatical
Week of April 12th, 2022 - Exchange Traded Funds, Rising Popularity of Digital Money, Development of FinTech Companies
Topic Breakdown - Exchange Traded Funds
If you are interested in the stock market and investing, you have probably heard of ETFs. ETF stands for exchange-traded fund. This just means that they are traded on the stock market exchange. ETFs are one of the simplest and easiest ways to invest in stocks and are perfect for virtually everyone. Typically, ETFs are a way to invest in an index or a type of stock. In this article, you will learn what ETFs are, why you should invest with them, and how to invest with them.
Introduction
To start, ETFs are a group of securities that, like individual stocks, can be bought and sold in shares on a stock exchange. In this article, we will mostly be covering Indexed ETFs, the most common type of ETF that people invest in. An indexed ETF is a fund that invests in the same assets as a specific index, such as the S&P 500, and tries to match the index's returns. According to Vanguard, “similar to index mutual funds, an ETF could contain hundreds—sometimes thousands—of stocks or bonds, spreading out your risk exposure compared to owning just a handful of individual stocks and bonds.”
Advantages
If you want to invest in the whole S&P 500 at once, the easiest way to do that is with an ETF like the SPDR S&P 500 Trust ETF (SPY). If you hold this ETF for many years, you will experience around the same gains as the S&P 500 index has had over the years, with an average of 10% gain per year. “ETFs have several advantages over traditional open-end funds. The 4 most prominent advantages are trading flexibility, portfolio diversification and risk management, lower costs, and tax benefits,” says Fidelity. ETFs are also low-risk investments because they don't cost too much and carry a basket of stocks or other securities, allowing for greater diversification. ETFs are a suitable sort of asset for most individual investors to use to develop a diversified portfolio.
Getting Started
We will now go over how to get started investing in an ETF. Firstly, you’ll need to open a brokerage account. If you are under 18, you can look into a custodial account with your parents. This account is how you will make all of your stock trade. Many brokerages have no account minimums, transaction fees, or inactivity penalties, so this can be done entirely online. It may seem confusing to open a brokerage account, but it's really no different than opening a bank account. Next, you need to decide which ETF(s) to buy by comparing options. The lower the expense ratio, the better, because this will reduce your profits. Volume is also important to consider when buying an ETF. Higher volume, or the number of shares traded over a time period, shows that an ETF is popular. Also take a look at the ETF’s holdings, or companies that make it up, and lastly, trading prices.
Financial Trends
Rising Popularity of Digital Money
There is a trend of central banks starting to launch digital currencies because of the US Federal Reserve’s exploration of creating its one form of digital currency, “Fedcoin”. In the history of finance, there has never been a monopoly on the provision of money as private systems that were established by the government regularly deposited insurance for providing services to discrete communities. When financial transactions are completed outside of the highly regulated financial systems and on other platforms, the standard regulations and legal procedures of consumer protection do not apply. Online platforms that allow their users to exchange private money with one another for or pay for goods and services are essentially a shadowy economy built upon a shadowy financial system.
However, at the same time cryptocurrencies which are a form of digital currency have been reported by analysts to pose a bigger threat to the stability of financial systems. The new forms of digital currencies that are being produced with different services and features have the possibility to become any nation’s form of currency. The primary threats that cryptocurrency pose to financial systems’ stability consists of competition with the dollar, availability throughout the world, introducing systematic risks, resistance to regulation and taxation, and the ability to be bundled with non-money services. Hence, in order to deal with these issues, central banks are planning to create their own digital currency that would offer consumers the same attractive features of cryptocurrency but with the benefit of a government backstop.
Development of FinTech Companies
FinTech (Financial Technology Companies) describes the industry based on developing digital technologies that can replace, improve, and supplement existing financial services. FinTech has been revolutionizing finance and the services it provides to consumers for years, especially in the access to financial services and payment methods that have been made available to consumers. Currently, FinTech companies are having the most success in retail banking, fundraising, and investment management. The most successful types of FinTech companies are those that are digital payment companies as the demand for a digital population from consumers is very high at the moment. The start of the major development for FinTech companies started around the same time as different cryptocurrencies were being introduced in 2009.
The introduction of Bitcoin in 2009 had a major effect on the finance in the world and various Fintech business models started to emerge. The most popular FinTech company is PayPal was founded in 1998 by Elon Musk, Peter Thiel, and Luke Nosek and it is an online payment system that allows consumers to purchase products and services online easily and safely. For FinTech start-up companies, the capital required for funding the company can be very expensive, and business owners have to consider different investment options such as angel investors, venture capital, crowdfunding, and traditional bank loans. The types of business models that made FinTech companies achieve financial success include but are not limited to alternate credit scoring, payment getaways, digital wallets, digital banking, and small-ticket loans.
Financial Guidance
“Risk comes from not knowing what you’re doing.” - Warren Buffet
While risk is inevitable in the unstable, unpredictable world of finance and economics. However, being more knowledgeable in your decisions means that you will be able to reduce the risk in your investments.
Money Fact
The biggest money bill that was ever used was a $100,000 bill that was used between the Federal Reserve Banks and the US Treasury.