How to buy an ETF (Step by Step investing)

How do you buy an ETF?

To buy an ETF, first open a brokerage account with a company like Vanguard. Research the exchange traded fund and transfer money to your brokerage account. To purchase, open your brokerage account and place a trade by entering the ETF, number of shares, and confirm the trade.

Imagine, taking your first steps towards building wealth through ETFs. Investing in exchange traded funds is a good way to make money!

However, in order to get rich, you’ve got to place your first trade!

Luckily for you, I’m going to show you everything you need to know about buying an ETF. You’ll get a basic understanding of ETFs and which one’s you should buy. With consistent investing, you might just be able to retire!

21-012 - How to buy an ETF (Step by Step investing)

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How to buy an ETF

To buy an ETF, you must first open a brokerage account and deposit funds. Research different exchange-traded funds and look for low cost ETFs. When you are ready to buy, place a trade by entering the ETF, number of shares, and confirm the trade. 

Buying your first exchange-traded fund doesn’t have to be complicated. However, most new investors get into trouble when they don’t know what they’re doing. Here’s what you need to know.

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Open a brokerage account

The first step towards buying an exchange traded fund is opening a brokerage account. A brokerage is the company that will take your money and invest it for you. You cannot place a stock market trade without a brokerage account.

Companies like Vanguard, TD Ameritrade, and Robinhood are examples of brokerages. Each company has their advantage, but the important thing to do is just open an account. 

For example, Vanguard is really good for buy-and-hold investors because the user interface isn’t set up for frequent trading. TD Ameritrade, especially the thinkorswim platform, has excellent charting and research tools. Robinhood, is the easiest to buy and sell with a few swipes of your thumb.

If you have absolutely no idea where to start, join Robinhood. The user interface is the easiest for new investors to understand. However, it is extremely easy to buy and sell so you need to be diligent when the market crashes.

For most brokerages, you can have an account up and running within 15 minutes. Usually, it’s just a matter of setting up an account, answering a few questions, and accepting the terms and conditions.

I think I set my TD Ameritrade account up in 15 minutes on my lunch break at work.

Once your account is set up, you will need to send some money to your brokerage account. This is the money you are setting aside to invest. However, it is important to note that any money sent to your brokerage account does not automatically invest it.

You will still need to research and find your first ETF and place a trade. Unfortunately, some people make the mistake of sending their money to their brokerage, but forget to invest.

Research ETFs

Once your brokerage account is open, you need to determine which ETFs you will be investing in. Each ETF has a different goal or underlined strategy in what the investment intends to do. In addition, each ETF has different expenses on which you should consider before you purchase.

What goal do you want your ETF to achieve?

ETFs have different investing goals such as investing in specific sectors, growth, value, blend, or dividends. Most of the relevant information can be found on the ETFs overview page. as you can expect, the overview page tells you the important details of an ETF.

Sector specific invest in a specific area such as technology, real estate, energy, or precious metals. Typically, investing in a sector specific ETF isn’t the most diversified because you are investing in one asset class.

Growth stocks are the companies that are expected to increase in value quite rapidly. People buy growth ETFs because these companies are expected to make a lot of money.

Value ETFs are companies where the share price appears to be undervalued. In other words, you can buy the companies for much less than what they are worth. Although, there is no guarantee that the price will increase just because the company is undervalued.

Blend ETFs are a mix of growth and value. You are getting the best of both worlds.

Each type of ETF can be broken down even further into a small, mid, and large-cap. In other words, how much money each company has in market cap. Market cap is number of outstanding shares times share price.

Small cap ETFs contain stocks with less than 2 billion dollars in market cap. Mid cap focuses on 2 billion to 10 billion dollars and large-cap is anything over 10 billion.

What is the expense ratio of the ETF?

ETF expense ratios are an annual fee the brokerage charges for managing the ETF. The expense ratio is a percentage of your overall portfolio balance. Expense ratios range from 0.03% to over 1% and large fees can impact your investment returns.

For example, a $100,000 portfolio would be charged $1,000 annually at a 1% expense ratio. At 0.03%, you’ll only be charged $30.

Over time, the amount of money you pay for high-cost ETFs add up. Not only do you pay a large amount in fees, but you also lose a lot of money in compounding interest. Because you are paying a lot of money in fees, that money isn’t growing for you.

The best way to estimate the impact of expense ratios is to use an expense ratio calculator. A calculator can tell you how much money you’ll pay in fees and you can compare options.

Generally speaking, the lower your expense ratio the better the choice!

Place a Trade

When you’re ready to buy, you need to place a trade to buy the ETF. Open your brokerage account and find the location to purchase ETFs. Enter the ETF, number of shares, and confirm the trade. You’ll also be given the option to select order type, but most beginners should use the ‘market buy’ option.

As previously mentioned, buying stocks or ETFs on Robinhood is very straight forward. Because of the simplicity, Robinhood is great for new investors. Unfortunately, some of the other brokerages complicate the buying process more than it needs to be.

Most investors that buy for the long term should simply place a ‘market buy’ trade. A ‘market buy’ purchases the security at the best available price. However, other options exist such as:

  • Limit Order – Buy the share at a maximum price or lower.
  • Trailing Stop Order – If the share price increases by a certain amount above the lowest price, a market buy occurs.
  • Stop Order – Buy the share at a certain price or higher.
  • Stop Limit Order – If the share hits a certain price, buy the share at a maximum price or lower.

What ETF should a beginner buy?

Most new investors would benefit from purchasing a S&P 500 Index Fund, like VOO. The S&P 500 is an index fund which tracks the U.S. top 500 companies. Since inception, the S&P 500 has had an average annualized return of 10%.

The S&P 500 holds the top 500 United States companies. These are the biggest and most profitable companies, like Amazon, Tesla, Apple, and Johnson & Johnson. Remember, investing in profitable companies is what increases the value of your portfolio, which makes the S&P 500 perfect.

Your portfolio gets a good level of diversification because you’re purchasing 500 companies. The S&P 500 is a good starting point until you become more familiar with investing and branch out to different funds.

The S&P 500 has an annualized return of 10% since inception. As you would expect, the S&P 500 has had up and down years. However, the value of the S&P 500 has continued to grow and is expected to keep growing. Therefore, buy and hold investors shouldn’t fear investing in the S&P 500.

A new investor should look to invest in a low-cost S&P 500 index fund. As previously mentioned, fees range anywhere between 0.03% and over 1%. You’re buying the same index fund, so you shouldn’t pay more for the same product.

How much does it cost to buy an ETF?

In order to buy an exchange traded fund, you will need to have enough money to cover one share price. Some brokerages allow the purchase of fractional shares, so you can buy an ETF if you don’t have the full amount. The expense ratio will be the ongoing cost of holding the ETF.

In most cases, you will need enough money to purchase one share of the ETF. If your ETF is trading at a price of $200 per share, then you will need $200 to buy the ETF. 

However, some brokerages like Robinhood allow you to purchase fractional shares. When you own a fractional share, you own a portion of one share.

For example, let’s say the ETF you want to purchase is $200, but you only have $100. Robinhood will allow you to place an order to buy half of a share for $100. You are still getting the same returns and same great ETF for a fraction of the price. 

As previously mentioned, you will continue to have to pay the expense ratio. The expense ratio being an annual fee which is assessed on your portfolio balance.

Are there any fees for buying an ETF?

Some brokerages will charge a fee for placing the trade. However, due to the rise in free trade brokerages, like Robinhood, trading fees are starting to become something of the past. In addition, you will have to continue to pay the expense ratio for as long as you hold the ETF. 

Can I buy and sell an ETF on the same day?

You may buy and sell an exchange traded fund on the same day, with restrictions. Your brokerage may have certain limitations on the number of trades you can place. Not every brokerage acts like a trading platform and you are still subject to the PDT rule.

The first thing you need to understand is your brokerage. Some brokerages are specifically set up to facilitate active traders. For example, Vanguard will not let you be an active trader, but TD Ameritrade and Robinhood might.

Brokerages still have to comply with the PDT rule or ‘Pattern Day Trader’ rule. You cannot make four day trades within five business days. Failure to comply may result in your account being frozen or requiring you to keep $25k in your account at all times.

However the majority of day traders end up losing money. For most investors, it is much better to have a buy-and-hold strategy. Investors who buy and hold tend to make more money in the long run.

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Summary: How to buy an ETF

As you can see, there is a lot you need to know about buying your first ETF. The information can seem overwhelming, but once you start making your first trade it becomes easier.

The first step is to open your brokerage account and deposit money. Research your exchange-traded fund options and decide which ETF you would like to buy. Most investors would be perfectly well off with an S&P 500 Index Fund. Once you are ready to buy, place the trade with your brokerage.

There are fees associated with investing. First, you need to be aware of expense ratios. An expense ratio is an annual fee charged against your portfolio balance. So if you have $10,000 invested in VOO and a 0.03% expense ratio, you would pay $3.

Some brokerages may charge a fee for placing a trade. However, trading fees are starting to become obsolete.

Technically, you can buy and sell an ETF on the same day, but there are restrictions. If you do it once it’s probably not a big deal, but avoid doing it frequently. 

John is the founder of TightFist Finance and an expert in the field of personal finance. John has studied personal finance for over 10 years and has used his knowledge to pay down debt, grow his investment portfolio, and launch a financial based business. He is committed to sharing content related to personal finance based on his experience in his career, investing, and path towards reaching financial independence.