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Before you start trying to find the next GameStop or Tesla, remember the importance of long-term investing. Because we aren’t reading financial news every minute or have enough time to keep up with the thousands of companies on the stock market, we will be investing in ETFs. Simply put, EFTs are a bucket of stocks. For example, you have $100 that you want to invest in some social media company. You pull out your phone and see a familiar icon, and decide to put all your money in this app - after all, you use it daily, so it seems like a reliable choice. What if the next day they announce they are going bankrupt? You would lose all of the money you invested.
Now let’s start this scenario again, with $100 that you want to invest in some social media company. You search for a social media ETF on Google, and you find SOCL (The Global X Social Media ETF). You decide to put all of your money in it. This ETF has a 10% holding in Snapchat, 9% in Tencent (Chinese Tech Stock), 7% in Facebook, 7% in Twitter, etc. This means, from your $100, $10 go to SNAP, $9 to Tencent, $7 to FB, $7 to Twitter, etc. Now Snap goes bankrupt the next day. While the $10 you had in Snapchat goes to 0, Tencent, Facebook, and Twitter all release new updates that allow you to use similar features on their platform. This excitement drives their stock price up, and the ETF rises, and you potentially make money!
The first scenario is unlikely, but when you're starting out you can't afford to take a big loss, the bottom line is this: it is always better to play it safe. Why put all your eggs in one basket, when you can put them in different baskets that are often growing equally fast if not faster. You diversify your investments and minimize your risk — the two main things you need to ensure long-term success in the stock market.
Some EFTs to research to get started:
Innovative Companies: ARKK — Ark Innovation Fund
E-Gaming: BETZ — Roundhill Sports Betting and iGaming ETF
5-g Technology: FIVG — Defiance Next Gen Connectivity ETF
Lithium for Electric Vehicles: LIT — Global X Lithium & Battery Tech ETF
Up and Coming Tech Stocks: QQQJ — Invesco Exchange-Traded Fund Trust II Invesco NASDAQ NextGen 100 ETF
Genomics Companies: ARKG — ARK Genomic Revolution ETF
Telemedicine: EDOC — Global X Funds Global X Telemedicine & Digital health ETF
Definitely do more research on which sectors you think will grow the fastest and don’t forget to look at the expense ratio (ER is the percentage the people that organize the percentages in an ETF take for managing costs — these should ideally be between 0.25–0.75%, but definitely below 1%). Use websites like etfdb.com to explore the percentages of investment allocations for different companies in the ETF you are looking at and enjoy investing!
About the Author: Aditya Rathi is a student at the University of Pennsylvania studying Electrical Engineering with deeply-rooted interests in financial literacy and financial empowerment, management consulting, and youth mentoring.