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Friday’s Reader Question: How do I Buy an Exchange-Traded Fund?
By JLP | October 27, 2006
I’m going to try to start doing something new on Fridays. Each Friday I want to post a reader question, offer my response, and then open it up to you guys to weigh in with your thoughts. For those who are interested in asking a question, you can email your question to me using the email address located in the upper lefthand corner. Please be sure and put “Friday Question” in the subject line. I can’t promise that I will post your question but if I do, I promise not to use your name in the post.
That said, here’s today’s Friday Question:
Hello,
My name is E. and I have been reading your blog for a few months. I’m starting to get a grip on my personal finaces and I was wondering if I could ask you a few questions. I am reading the reviews of the Boglehead’s guide to investing. It sounds like a good book. I think that I will borrow it from the library. I might not know enough to really understand it. I think the book might be way over my head and I really want to learn about finances.
My main question is (please do not laugh). If I wanted to buy an ETF where would I go? Is there an etf store? How much money do I bring to buy an etf? I don’t want to appear like an idiot.
My response:
E.,
You don’t look like an idiot. I think it is great that you took the initiative to ask the question.
First off, you have to decide if an ETF is even right for you. Because ETFs trade like a stock, there are commissions each time you buy or sell one. So, if you are investing a small amount of money on a regular basis, then you would probably be better off investing in a no-load index fund.
Now to answer your question:
As I said before, an ETF trades like a stock. In order to buy an ETF, you need two things:
1. A brokerage account with a firm like Scottrade, TDAmeritrade, or even a full-service broker like MerrillLynch.
2. The name and ticker symbol of the ETF you want to purchase. You can find this information on the YahooFinance ETF website, which contains a WEALTH of information.
As far as how much money you need in order to purchase and ETF, it depends. You will need enough to purchase the ETF and pay for the commission. If you have an account with Sharebuilder, you can buy fractional shares. Here’s an example of what a fractional share is:
Say you have $100 to invest and you want to buy an ETF that is trading at $78 per share. Sharebuilder charges $4 to do the trade, so you have $96 to put toward your purchase, which would buy you 1.2307 shares ($96 ÷ $78 = 1.2307) of the ETF. In other words, you only have enough to buy ONE full share and about 1/4 of another share.
Now it is time for readers of AFM to weigh in. What are your thoughts?
Topics: Exchange-Traded Funds, Investing, Question of the Day |