How To Trade ETFs
Welcome to Trading Brokers step by step guide to trading ETFs online. Here you will find an easy to understand explanation of ETF trading. This includes how to trade ETFs online, what you need to trade ETFs and how to open a trading account with a broker so that you can start trading ETFs online today.
Maybe you have heard of trading ETFs online or through a friend. Perhaps you are looking to trade and are curious about the different options available to you. Whether you are looking to speculate, invest or just learn more, this guide on how to trade ETFs can help you along your journey.
What are ETFs?
Exchange traded funds (ETFs) are baskets of securities that trade intraday like individual stocks on an exchange, and are typically designed to track the performance of an existing market or group of markets. ETFs share a lot of similarities with mutual funds in they have a fund holding approach in their structure, but trade more like stocks. That means they have numerous holdings, which can be considered to be sort of like a mini-portfolio. The fund will either physically buy a basket of the assets they are tracking or use more complicated investments to mimic the movement of the underlying market.
Each ETF is usually focused on a specific sector, asset class, or category. ETFs can be commonly used to help diversify your investment portfolio, or, for the active trader, they can be used to try and take advantage of price movements.
In addition to this, since ETFs are traded on an exchange like stocks, some brokers allow you to take a short (sell) position with many of them. A short position in this manner can give a trader the opportunity to sell an ETF without actually owning it in order to try profit from downward price movement. However, if you take a short position on an ETF, there would theoretically be unlimited risk in the event of the price moving up in the opposite direction. Speculating on price movements without owning the underlying asset is frequently known as CFD trading (contract for differences).
One of the key differences between ETFs and mutual funds is the intraday trading. Mutual funds settle on one price at the end of the trading day, known as the net asset value (NAV). ETFs on the other hand are traded on the exchange during the day, so their price fluctuates continuously along with the market supply and demand, just like stocks, forex, commodities, cryptocurrencies and other intraday traded securities.
How does ETF trading work?
ETFs are bought and sold on a stock exchange in a similar way as stocks are traded. However, they do not grant the investor shareholder rights in the same way as traditional investing can. For example, stock ETFs can pay dividends, but do not grant the holder voting rights. If you want to be an active shareholder, you may wish to consider trading shares instead. Likewise, investing in a commodity-based ETF would not grant you physical ownership of the underlying asset.
Why trade ETFs?
ETFs can help traders gain the advantages of diversity with a basket of holdings, while also allowing them to take advantage of price movements because they trade during the day like stocks, forex and other day trading instruments.
- Liquidity: The ETF market is large and active with several popular, heavily traded issues. This can give ample opportunity to enter and exit trades. However, liquidity varies greatly between ETFs, with some narrowly focused ETFs being more illiquid than others.
- Choices: Most ETF brokers will have a variety of ETFs for clients to choose from across different asset classes, such as stocks and bonds. You should be able to choose ETFs according to sector, investment style, geographic area, and more. There are new ETFs that are frequently being introduced that create an even more innovative blend of holdings.
- Diversity: Some investors may find that trading ETFs can be a useful way to diversify into markets that they might not otherwise have invested or traded in. This is primarily because ETFs are baskets of assets rather than individual stocks, which means that ETFs allow for a more diverse approach to investing in different areas, which could be viewed as a way to spread out and mitigate the overall risks for some investors.
- Commissions and Fees: Most ETF brokers will charge a commission fee for trading ETFs online. However, there are some brokers who provide access to a variety of commission-free ETFs. In general, an ETF tends to be more cost-efficient than an actively managed mutual fund, because of its indexed nature. This sometimes results in lower fees.
Where to trade ETFs?
ASIC, BVI, CBI, FFAJ, FSA, FSCA
Min $100 Deposit
FCA, CFTC, NFA, BaFin, FINMA, ASIC, FMA, MAS, FSA, FSCA, DFSA, JFSA, METI, MAFF
Min $250 Deposit
ASIC, FCA, DFSA, SCB, CySEC, BaFin
Min $200 Deposit
ASIC, CySEC, IFSC
Min $5 Deposit
What are the types of ETF?
Stock index ETFs
Stock index ETFs are funds that track the performance of a specific index. Stock indices represent a group of shares, whilst ETFs can enable you to gain such exposure from a single position, as they can track multiple stocks.
As an example, a FTSE 100 ETF would track the performance of the FTSE 100, and would either hold physical shares of the index’s constituents, or products that mimic its price movements.
Investors and trades can access the forex market through currency ETFs without having to buy or sell the underlying currencies. Currency ETFs can track a single currency or more commonly baskets of currencies.
Currency ETFs may be used as a way to gain exposure to the general economic health of a particular region (such as the EU) or other emerging market economies. These ETFs may also be used for hedging against inflation and foreign asset risk.
Sector & industry ETFs
A sector or industry ETF will track an index that consists of companies operating within the same industry. Most industries will have an index that comprises of major stocks. As an example, the gold sector has the S&P 500 Global Gold Index, which implements the securities from that sector including miners, researchers and producers.
In a similar way to currency ETFs, sector ETFs may be used as a way to try and take advantage of changes in an economy’s health and also to hedge against any existing positions. If an investor or trader has significant risk in a particular sector, they may consider mitigating this risk by shorting a sector ETF.
Commodity ETFs are not made up of the underlying commodity, but are instead derivative contracts that take their price from the commodity. This enables investors and traders to speculate on the price of various commodities without having to take physical ownership of the underlying asset.
It should be noted that there is a distinct difference between commodity ETFs and commodity-linked ETFs, such as the sector ETFs described above. Commodity ETFs actually emulate the price of the underlying commodity, whereas commodity-linked assets track companies within the industry.
Inverse or short ETFs
Inverse ETFs are those funds that move in the opposite direction to the underlying asset. Thus, any movement that the asset makes, the inverse ETF will do the opposite. They can usually be found on any of the aforementioned categories of ETFs.
Investors and traders may tend to use inverse ETFs as a means of opening short positions on the market. This can be for the purpose of hedging existing long positions, or just a way of speculating on potential falling markets.
Leveraged ETFs are designed to mirror an underlying asset but use financial derivatives to amplify investors’ exposure. For example, a leveraged 3x ETF would maintain a $3 exposure to the underlying asset for every $1 of investor capital.
Trading with leverage can greatly increase risks and losses. It is therefore imperative to have a clear understanding of how leveraged trading works and the significant risks involved. Professional traders would thoroughly research ETFs and create a risk management strategy before opening a position.
How to trade ETFs online?
If you have taken the time to read through the above, you should hopefully have an understanding of how to trade ETFs. Here is a summary of the key steps:
1. Decide if ETF trading is for you
Trading ETFs online carries an element of risk and can take more time than other forms of investing. You will need to research ETFs, manage your positions, follow market news and decide how to react to it. It is important to understand the risks and dedication that comes with trading ETFs online.
2. Educate yourself
Before trading ETFs, it is imperative to learn as much as possible about investing and ETFs in particular. Any mistake could prove to be costly. There is an abundance of free educational materials provided by many online brokers that can help you to improve your trading skills and knowledge.
Most ETF brokerages will also provide a free demo trading account so that you can practice trading ETFs online with virtual funds in order to familiarise yourself with the trading platforms and practice your trading strategies until you feel confident enough to open a real trading account.
3. Choose an ETF broker
In order to trade ETFs online, you will need a broker account and trading platform to execute your trade positions through to the markets. When choosing a broker, there are a few important things to consider such as regulation, commission fees, platforms, tools, education, funding options and customer support.
If you do not have the time to research brokers, you can see a list of our best brokers that we have already prepared to help traders. If you would like to know more, you can also view our detailed guide on how to choose a trading broker.
4. Research ETFs
If you have made it this far then you may be ready to start trading ETFs online! The next step is to research the different ETFs to discover those in which you have an interest in trading. Perhaps there is a particular industry, product or service that is already of interest to you. Many brokers will allow you to filter ETFs according to various criteria in order to narrow down your search if need be.
Many traders will begin by analysing different companies, studying public information such as finances, earnings and reports from professional analysts. The best brokers should have this information conveniently displayed for you within their trading platform.
5. Have an ETF trading plan
Some of the most important factors that can help determine ETF trading performance can be the trading plan and discipline. It is important to have a solid trading plan personalised to your own needs that includes the money management and trading strategy that you will use. Most experts and professional traders would try to not let negative emotions such as fear, anger and greed affect their trading strategy.
6. Buy and sell ETFs
Once you know what ETFs you want to trade online, you can analyse them to help decide if and when you will place your trades. After placing an ETF trade, you will need to keep track of how it performs and manage it according to your trading plan. Some investors will keep hold of ETFs for the long-term, whereas traders may buy and sell ETFs on a daily basis.
Is ETF trading right for me?
Trading ETFs is a popular way to gain exposure to a range of markets from just a single position, including indices, sectors, commodities and currencies. ETFs are popular among investors as they can offer a broad market exposure from just a single position.
However, it is important to understand the significant risks involved with trading ETFs online, especially when using leveraged positions. Most experts would suggest trading on a demo account with virtual funds to begin with.
This can be a useful way to familiarise yourself with how to trade ETFs and using trading platforms whilst allowing you to practice your trading strategies until you feel confident and produce consistent results. Most ETF brokers provide unlimited demo accounts free of charge.
Not sure which ETF broker to trade online with?
If you are still unsure which ETF broker is the best for you to trade online with then you can use our free online broker comparison tool to quickly compare ETF brokers based on regulations, minimum deposit, leverage, spreads, commissions, funding options and more. You can also read our broker reviews and choose from our best brokers, best trading platforms, best copy trading platforms, best social trading platforms and best trading apps. If you would like to look for the best trading brokers in a particular country, we have pages dedicated to our best brokers USA, best brokers UK, best brokers Australia, best brokers South Africa and best brokers Canada.
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