INVESTING

What Do Social Media and ETFs Have in Common?

If you have considered beginning your investment journey, started to do the research, and have become overwhelmed time and again, this article is for you. We’re going to focus on just one area of investing — exchange-traded funds (ETFs) — and compare the options to something most people are familiar with — social media!

Defining Social Media

Investopedia defines social media as a “digital technology that allows the sharing of ideas and information, including text and visuals, through virtual networks and communities.” Social media is also a collection of platforms that allows users to connect with each other locally and worldwide. When talking about social media, most people are referring to this collection of platforms and generally specify which ones they mean — Instagram, Facebook, etc.

Defining ETFs

An ETF is an exchange-traded fund, which simply means it’s a fund that is exchanged and traded on the market like a regular stock. Like stocks, an ETF can be traded on the market throughout the day while prices fluctuate as part of the buying and selling process.

ETFs differ from stocks because the “fund” holds multiple asset classes — such as stocks, bonds, commodities, or a collection of industry investments — whereas a stock is THE asset (or piece of one company) giving you partial ownership.

An ETF and Social Media Analogy

Most people are familiar with social media and understand that it allows the public various ways to interact, engage and communicate close to home and around the world. The term “social media” also refers to different types of platforms including Facebook, Instagram, TikTok, LinkedIn and others to help facilitate this global communication.

ETFs operate similarly. They allow people to participate in investing both in local and global markets through various assets, just as different platforms allow you to engage in different ways on social media.

**Simply formulated: **

• Facebook, LinkedIn, Instagram, TikTok, etc. = Social Media
• Stocks, bonds, commodities, industries and sectors = ETF

ETF Asset Classes

Stocks are securities that represent equity in a company, also allowing you to gain ownership rights. If the company does well, so does your investment; if it doesn’t do well, neither does your investment. Think of stocks like Facebook in this social media analogy. Stocks are the original asset class just as Facebook is the oldest social media platform still in operation — somewhat an original. Facebook can come with a lot of risks — including fraud — but also with the reward of connectedness depending on the knowledge of the user. Stocks are similar — they come with the risk of loss, but they also present opportunities for rewards, such as increasing wealth with due diligence.

Bonds don’t give ownership rights because they represent money raised or borrowed from investors (you!) by a company or the government to undertake new projects. The company or government pays you the interest, allowing you to earn an income from the bond. Bonds are a common investment choice for ETFs because they offer a stream of income, whereas stocks earnings are not liquid until the stock is sold. Bonds could be compared to LinkedIn in our social media analogy. LinkedIn is a professional networking platform that mainly has a positive return — it allows you to connect and network, which could lead to jobs, promotions and overall professional advantages. Likewise, bonds usually have a positive return that allows you to build wealth and increase your income in a more stable way.

Commodities are defined by Investopedia as a basic good used in commerce that is interchangeable with other goods of the same type. A few examples include oil, gold, beef, lumber and natural gas. Commodities are rated and exchanged for the same price based upon their rating no matter who the producer is. Ratings are what allows a commodity to increase or decrease in price. When considering commodities in our social media analogy, think of them as TikTok. Just as TikTok allows you to choose categories of content you prefer, commodities allow you to choose the goods you want to invest in.

Industries and sectors focus on the same area of business, such as technology or energy. While natural gas and oil are a commodity, there is also the entire sector of energy which can include solar, wind and water energy production. Just as Instagram uses various hashtags to search a genre or category of content that can encompass many different topics, industry and sector assets give you broader categories with many different “topics” for investing.

Final Thoughts

Each ETF has different components that allow you to participate in investing, just as social media has different platforms that allow you to engage in connecting.

As our social media preferences and journeys differ, our investing knowledge and strategies will differ too. If at first investing seems confusing to you, try to relate it to something you are familiar with. Once you feel you have an understanding, take a few more steps on your investing journey by re-evaluating your budget to determine if you are financially ready to begin. If the answer is yes, be sure to do your research or find a reputable company to help guide you.

Sources:

https://www.schwab.com/etfs/understand-etfs

https://www.investopedia.com/terms/e/etf.asp

https://investor.vanguard.com/investor-resources-education/understanding-investment-types/what-is-a-bond

https://www.investopedia.com/terms/c/commodity.asp

https://www.investopedia.com/terms/s/social-media.asp