Investing in Exchange Traded Funds, or ETFs, is a strategy that has been gaining a lot of traction over the past few years. The theory is that the average investor, or mutual fund manager, is not likely to consistently earn greater returns that the overall stock markets in general, so why even try?
When you invest in ETFs, you will generally pay a lot less fees and spend a lot less time managing your investments. I don’t know about you but this sounds like a win-win for most people. The problem is many newer investors do not even know what exchange traded funds are.
What is an Exchange Traded Fund?
Exchange Traded Funds are simply a basket of stocks that are designed to mimic the underlying stock market index. A few common examples include the S&P500 and the NASDAQ. What many people fail to realize is that the ETFs can only create shares that equal the number of equivalent shares that are held in the custodial bank. In this way, shareholders are protected against phantom ETFs being created (ie the ETFs have real value).
Since the ETFs sell for the same value as the underlying shares, investors can simply sell their shares on the open market whenever they want making them just as liquid as any other commonly held stock.
Ever since the financial crisis of 2008 and the increased call for transparency by the public in terms of trading activities, it has become increasingly important for a financial company to have an insider trading compliance program. Adopting and using a comprehensive software tool that includes such features as easily updated restricted list securities and employee portfolio tracking can be a cost-effective way to ensure the safety of both the public image and compliance procedures of any financial firm. While employee trading need not be a focus of a financial firm’s attention, overlooking it can have significantly negative results.
Whether a firm limits the trading of its own stock, or must restrict employees from trading in stocks that have been traded by the firms trading group, maintaining a comprehensive and up-to-date list is critical. The advantage of good compliance software is that it allows authorized individuals to monitor and update this list on a real-time basis, so as to avoid problems. By ensuring that the appropriate personnel can monitor and disseminate this information, and other can ensure its accuracy, an organization can successfully ensure that this issue is covered.
In addition to maintaining a comprehensive and up-to-date list of restricted securities, it is important for those firms involved in the financial industry, especially those that have access to material, non-public information, to have a compliance program in place that prevents insider trading. Insider trading is a violation of SEC rule 10(b)(5), and involves the transacting in any securities for which the transacting individual is in possession of information that is not publicly available and is material. The test for materiality is whether or not the information is likely to impact the price of the security when it becomes publicly available.
Many firms, if not most, in this industry require employees to not only have copies of trade confirms and account statements sent directly to the compliance department, but require that the employee sign a disclosure statement at least annually. Depending on the size of the firm, organizing and interpreting all of this information can become a tedious procedure. The result is that mistake may be easily made. If, however, a robust software solution is in place, much of this task can be automated. This not only reduces the incidents of mistakes, but allows for firm-wide reporting that can be a valuable tool to the compliance department and to upper management.
Individual retirement accounts (IRA) can be directed by banks or financial institutions specialized in retirement. However you may also decide to direct your own investments concerning your retirement account. This is called a self directed retirement account. Along with traditional tax deductible retirement plans there is another option called the self directed Roth IRA. In this kind of retirement plan, your retirement savings are not deductible but when the time to collect the accumulated amount your savings are not taxed.
If your tax bracket is not very high you can decide to start a self directed Roth IRA. If you plan to have a self directed retirement plan the law requires you to have a qualified custodian. This does not mean that the custodian is going to make the investment decisions. His only function is being the legal liable of your savings and if you want, showing you different investment options to choose from. All the legal obligations and paperwork will also be his responsibility.
He will be responsible for transactions and the reports about them he will send files to the IRS issue your statements and undertake administrative duties. There are lots of high interest investment options you can choose from. However you must keep in mind that as the interest increases the risk may also increase. Another advantage of a Roth Ira is that the transactions and operations inside a Roth account are also exempt from tax. This means when you see an opportunity and change the direction of your investments, you dont pay extra tax for your transactions. For example you can sell all your stocks and invest all the money in bonds without paying any federal income tax which may be recognized in a normal investment account.
You can invest in a broad range of profitable areas. However there are some limits placed by the IRS about the types of assets that you can make investments on.