Trading 'Market' Instruments

[painofhell]

Many investors do not have time nor expertise to evaluate and select the "right" individual stocks so various instruments have been developed to capture the performance of a broader spectrum of stocks.

Mutual Funds
Mutual funds package stocks from a sector, from a region, the market as a whole or many other ways to provide a diversified fund based on a collection of individual stocks. Basing performance on a number of stocks reduces risk and can enhance profits compared to investing in a few individual stocks. Funds can be geared to provide aggressive growth, growth and income, long-term appreciation or a number of other investment goals, and their performance is often measured against some benchmark.

Mutual funds have become so popular and the number of funds so numerous that it is now as difficult to pick a "good" mutual fund as it is a stock. Although these funds offer diversity and professional management for investors, they have some limitations and may not be the best vehicles for active traders.

Index Funds
Rather than select individual stocks for a fund, some funds just include all of the stocks in an index such as the S&P 500 Index or one of the sector indexes. Their performance should roughly coincide with the performance of the index.

Index Options
These derivatives are also based on an actual cash index such as the S&P 500 Index (SPX) and the S&P 100 Index (OEX), which cover a number of stocks. Overall market direction and time are important elements to consider.

Exchange-Traded Funds (ETFs), Index Shares, Index Tracking Stocks

These products act like an index but are traded like a stock and have become very popular since they were introduced by the American Stock Exchange in 1993. More than 300 ETFs are available today. The most popular leaders include:

• DIA or "DIAMONDS" - based on the Dow Jones Industrial Average and priced at approximately 1/100 of the value of the DJIA.
• QQQ or "Qubes" - based on the Nasdaq-100 Index and the most successful index share contract. It is priced at approximately 1/20 of the value of the index.
• SPDRs - based on the S&P 500 Index.
• Select Sector SPDR Funds - based on nine specific industry sectors.
• WEBS - World Equity Benchmark shares on 17 different foreign countries based on Morgan Stanley Capital International (MSCI) Indexes.
• HOLDRS - depository receipts on selections of stocks in various areas.

ETF instruments offer traders a number of advantages:

Invest in a portfolio of stocks represented by an index with a single transaction in one stock-like instrument.