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Answer:
Dear
Alvin,
Index
investing is a way to own shares in some of the best-known
stocks, in smaller companies, or in stocks in certain
categories or sectors. Although it's a no-brainer
-- because you don't have to make decisions about
which stocks to buy -- it's important to keep in mind
that you will do only as well (or as poorly) as the
index itself.
The
indexes
The
Standard & Poor 500 (aka, S&P 500), the Dow Jones
Industrial Average (DJIA), the Nasdaq 100 are among
the most popular indexes. Each one consists of a group
of stocks that represent a portion or portions of
the market.
The
S&P 500, for example, is made up of stocks of the
500 leading companies whereas the Dow Jones is composed
of 30 companies selected by the editors of the Wall
Street Journal -- well known blue chips. So, if
you invest in either of these two indexes, you will
be a part owner of the companies that are in the index.
How
to invest
The
two primary ways to invest in indexes are through
mutual funds and through "exchange-traded funds" (ETFs),
which are index funds that trade like regular stocks.
BUYandHOLD
does not offer mutual funds, however, you can invest
in ETFs here at BUYandHOLD.
Just
to clarify once again -- ETFs are baskets of securities
traded on an exchange throughout the trading day.
They can be sold short and also bought on margin (however
BUYandHOLD does not offer margin accounts). Unlike
mutual funds, there are options available on a handful
of the ETFs. There are both domestic and international
ETFs as well as several bond ETFs.
Some
of the players
-
The ETFs that track the various S&P indexes are
called Spiders. The most popular is the SPDR Trust
Series 1 which tracks the S&P 500 Index. Its symbol
on the AMEX is SPY.
- The
ETF that tracks the broad market is called VIPERS.
Its symbol on the AMEX is VPI.
- The
ETF that tracks the Dow Jones Industrial Average
is called Diamonds. Its symbol on the AMEX is DIA.
- The
ETF that tracks the Nasdaq 100 Index is called Qube.
Its symbol on Nasdaq is QQQQ. (Its original symbols
was QQQ; then in 2005, it switched from the American
Stock Exchange to the Nasdaq and added a "Q" to
its ticker symbol.)
- The
ETF that tracks the Russell 2000 is called iShares
Russell 2000. Its symbol on the AMEX is IWM.
Note:
The Russell index is updated annually by the Frank
Russell Company.
Four
points to consider
1)
Because ETFs trade as stocks, you can buy and
sell them throughout the day.
2)
There is generally no investment minimum (as there
is with a mutual fund); however BUYandHOLD has a $20
minimum investment for all trades.
3)
If you have chosen to reinvest your dividends,
any dividends earned will be put into the security
you purchased. Click
here to learn more about dividend reinvestment
at BUYandHOLD.
4)
If you place an ETF into your BUYandHOLD IRA, the
gains will grow tax free until withdrawn.
Click
here for a complete list of ETFs offered at
BUYandHOLD.
For
Further Information
Three
excellent sources:
www.sec.gov/answers/etf.htm
www.amex.com
Morningstar
ETFs 100. The 2006 edition of this book, which
evaluates the 2005 performance of all ETFs, has just
been released by Wiley Publishing. Check your public
library for a copy. If you wish to buy your own, it's
$29.95.
Good
luck!
BUYandHOLD
does not offer or provide any investment advice or
opinion regarding the nature, potential, value, suitability
or profitability of any particular security, portfolio
of securities, transaction or investment strategy.
Any investment decisions you make will be based solely
on your evaluation of your financial circumstances,
investment objectives, risk tolerance, and liquidity
needs. The securities mentioned above are being used
for illustrative purposes only and should not be regarded
as an offer to sell or as a solicitation of an offer
to buy and past performance is no guarantee of future
results.
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