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[quote=Anonymous]A mutual fund is what it sounds like-- a bunch of people put money into the fund and the fund buy stocks (or other securities) with that money, and gives shares in the fund to its investors.  Each day after the market closes, the mutual fund figures out what its holdings are worth and buys/sells its shares to people who want in or out.

An ETF is also a basket of stocks, but they have been bundled together into a new security, which is bought and sold on the markets like other stocks.  That means that if you want to buy/sell it you don't wait til the end of the day and get a guaranteed price from the sponsor-- instead you find someone who wants to do the opposite of you and find a price you agree on (just like for your individual stock purchases).  It's technically possible for the value of the ETF to deviate from the value of the bundled stocks in it, but this doesn't happen too often because most ETFs can be broken up and sold for parts if the values diverge too much.

So the differences aren't huge, but a mutual fund will never have transaction fees for buying/selling if you buy/sell from the fund-- if you are doing it through a brokerage then there may be charges imposed by the brokerage.

An ETF has transaction fees for each purchase/sale just like a stock would, plus there are some hidden costs in the buy/ask process.  Some (most?) ETFs allow dividends to be reinvested without triggering transaction costs, but you might check with your brokerage as to how that's handled if you are planning to do that.

On the other hand, you can buy/sell an ETF any time during the trading day, while a mutual fund will only let you buy/sell once a day, after closing.[/quote]

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