Stock market authorities usually advise newbies to try out exchange trade funds (ETF) as one of their first investment ventures. Beginners who want to take this expert advice can learn from this article that will discuss the ABCs of ETFs so they can get to the stock market investing real quick. We will debunk the concept, its unique qualities and how to properly conduct buy and sell transactions.
What is Exchange Traded Funds (ETF)?
ETF is a fund that tracks indexes from different market sectors, which works similar to a mutual fund. The fund is collected from several other investors and the money pooled from it is used to invest in a variety of assets (stocks, currencies, options, bonds, etc.). However, investors take advantage of more freedom than with mutual fund transactions. In a mutual fund, you can only execute one transaction daily, but with ETFs, you enjoy convenience and independence. You can buy and sell them whenever the market is open, unlike mutual funds that have a designated period to carry out deals.
Advantages of ETFs
- Trades like stocks
- Well-structured
- Lower fees
- Better tax efficiency
- Transparent
- Helps investors get exposed to several market sectors
How to pick the right Exchange Traded Funds (ETFs)?
- Check out the underlying indexes. Some of these funds aim to get more exposure to as many market sectors that it can, while others just want to beat the market. Most ETFs allow you to freely view their holdings so do not hesitate to examine these factors before you close a transaction.
- Do not adhere to the general rule of thumb saying the better choice is the ETF with a lower expense ratio. Focus more on the tracking difference. The lower the difference, the better the fund. You would need to rely on the fund manager’s efficiency in tracking indexes and in foreseeing other factors that will affect the fund’s overall costs.
- Make sure you pick a liquid fund. Can it be traded at a price close to its real value? Are the separate assets included in the fund fluid enough to be traded at the tighter bid and ask spreads? Ask yourself these questions before you go ahead and dive into that ETF.
Risks involved in trading ETFs
- You are exposed to as many market risks as your fund is exposed. The ETF tracks indexes from several sectors. The same goes when a sector in your fund suddenly performs poorly.
- It is hard to know which companies from these sectors will prosper in the end. All the securities depend on how these companies will play in the competition. You can pick a fund that indexes a healthy company at the moment. But ultimately, the company gets outperformed by an emerging company in the same sector.
Related post: Understanding Loss in Commodity ETFs
How to buy and sell ETFs
This list will help you carry out your very first ETF transaction. Especially if you are new to investing and have not traded stocks before, you can follow this step-by-step guide.
- After doing the background research and picking which fund you want to invest on, set-up an account with an online brokerage service of your choice.
- Depending on which website brokerage you registered your account; it shall offer you a number of choices. All you need to do is input the corresponding symbol (or locate it among their list if you do not know the symbol yet) and indicate how many shares you plan to buy.
- Know about the types of orders. There are market orders, limit orders and stop orders. Place an order according to how you prefer your ETF transaction executed. When you are sure that have set your specific conditions to the trade, submit the order and wait for order update when the trade is accomplished.
Finding out more about ETFs
You could benefit greatly from stocks investment training to deepen your knowledge and advance investing skills. This is especially helpful if you are a beginner familiarizing yourself in different types of investments. These training courses include lectures, case studies, valid data presentation and other training materials. You can also purchase stock investing books authored by legitimate stock market specialists. With this, you can learn techniques from the best sources.
Ready To Become A Smart Trader?
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