The official definition of an exchange-traded fund is (according to investopedia)

A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.

Why invest in an ETF?

Like stated at the very beginning of this article, an ETF allows you to increase your diversity, but still trade it like a stock. For example, if you like the financial sector, then why pick just one stock to invest? You could find an ETF that traces the gains and losses of a collection of financial stocks. That way you are not required to pick the winner out of the group.

It seems like there are ETFs that cover almost every sector and index now. You can see a full list of ETF’s over at Yahoo’s database and 40 Great Inverse / Short ETFs For Bearish Investors. There is also a form called a leveraged ETF, which makes 2 to 3x returns of the index its tracking.

You might also be curious in check out how trade triangles can help you trade in the ETF markets.