An exchange traded fund is usually a specialized type of stock-based investment fund, and is typically traded on major stock exchanges like NASDAQ, the New York Stock Exchange (NYSE). ETFs are comparable in several ways to mutual funds, including the fact that both ETFs and mutual funds can be purchased and sold during the day on major stock exchanges, while mutual funds must be purchased and held at night. However, unlike mutual funds which trade on numerous different exchanges, and therefore experience rapid fluctuations in price when news about an investment company or industry occurs, ETFs generally only trade one time on a particular exchange. This limited trading means that ETF prices tend to remain fairly constant from day to day.

In addition to holding the majority of their portfolio in common stocks, individual investors can also purchase ETFs that specialize in a particular sector, industry or market. Popular sectors include energy, communications, industrials, financials and technology. ETFs typically specialize in these industries so that investors can diversify their portfolio and increase the probability of seeing continued returns from their investments.

Investing in ETFs can also be beneficial because ETFs do not require you to hold all of the portfolio yourself. When you are buying individual securities through a mutual fund, it is necessary for you to buy the entire portfolio, which may include hundreds of different securities and certificates. When you are investing in ETFs, since they do not require you to buy all of the portfolio all at once, you are not actually diversifying your portfolio but instead are obtaining a greater degree of protection for each individual security by diversifying across many different types of securities.

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