Hello guys, welcome back to our stock trading class.
So far, we've covered two investment strategies in our class: value investing and technical analysis. With the two strategies, you may get a chance to beat the market. Nothing comes easily, neither do returns in the stock market.
Is there an easy way out for beginners?
The answer is yes. There's a strategy known as passive investing.
John Bogle, the founding father of passive investing, once said: "Don't look for the needle in the haystack. Just buy the haystack!” Like finding a needle in the haystack, stock picking could be very hard for some investors. Buying the entire market may be another option.
The question is: there are tens of thousands of stocks in the market, how can we buy them all？
In fact, we can use benchmark indexes to track the broad market movements. For example, the S&P 500 and Dow Jones Industrial Average are two of the most popular benchmark indexes, showing the overall performance of the U.S. stock market.
Each index is composed of a selection of high-quality stocks. As the value of the stocks grows, the benchmark index rises. For example, the S&P 500 index has gone up by about 280% during the last decade.
What's worth pointing out is that, you cannot buy an index directly. One solution is for you to manually replicate the S&P 500 constituents.
Another option is to invest in an index ETF.
In fact, an index ETF is a type of fund that receives money from individual investors. The fund manager of an index ETF will buy the index constituents in proportion to their representation in that index.
Let's take SPDR S&P 500 ETF, or SPY, as an example.
This is an ETF that tracks the performance of the S&P 500 Index. Buying one share of SPY enables you to own a fraction of every single stock in the S&P 500.
Another good thing about investing in index ETFs is that you can buy and sell anytime on the exchange just like trading stocks.
Apart from SPY, you can also find ETFs that track different stock market indexes, like Nasdaq, FTSE 100, Shanghai Composite Index and so on.
To conclude, passive investing is a strategy that helps investors to get the average stock market return, and investing in Index ETFs is one of the most common forms of passive investing.
This marks the end of this stock trading class. If you'd like to learn more investing knowledge, follow us! Goodbye until next time!