When you invest in the stock market you can do it a number of ways.  One way, of course, is to just go out and buy an individual stock.  For example, you could buy some Microsoft stock, if you were interested in investing in technology.

But there’s another way too.  And that would be to buy a stock fund, which is a basket of different company stocks.  In this case, since you were interested in investing in technology, you might buy a technology fund made up of different technology stocks like Microsoft, Apple, IBM and others.

So that’s what a fund is, really.  It’s a predefined group of stocks you can invest in.  So when you buy a fund, you get ownership into all of those different stocks in one fell swoop.  Otherwise, you would have to go out and buy them individually, one company’s stock at a time.

And one of the benefits of owning all of those different stocks is reduced risk.  That’s because they provide you with built in diversification.  That is to say, if one of the stocks is down, like Apple, then Microsoft and IBM might both be up.  So they kind of cancel out the loss that Apple is having.

We’re going to look at a specific type of fund in these post, called an Exchange Traded Fund (or ETF for short).  ETF’s are one of my favorite types of funds to invest in, as opposed to the more traditional Mutual Funds.  So in our next post we will get into that, and look at what is so different about “Exchange Traded” Funds.

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NOTE THAT NOT ALL FUNDS ARE STOCK FUNDS:  Before we move on, just note that not all funds are stock funds.  There are funds for many kinds of investments including bond funds, commodity funds, currency funds, etc.

But we’re going to keep it simple and stick to stock funds for now.  Then once we’ve got the basics down we’ll pick up on some of those other funds as it makes sense to look into them.