Step-by-Step Guide to Trading ETFs
Essentially, ETF is an exchange-traded fund. The concept behind ETFs is that these follow specific indexes, such as QQQ, which essentially tracks the performance of the Nasdaq-100. In case you don’t know what Nasdaq-100 is, you should know that it is made up of one hundred companies. It happens to be one of the most popular indexes.
Read on to learn more.
Trading with ETFs – An Overview
As a beginner trader, you will enjoy trading with ETFs. Why, you might ask. The thing about ETFs is that they offer a simple, cost-effective way to get exposure to financial markets around the globe. A little knowledge of how ETFs work and how you can trade ETFs will certainly go a long way in helping you, along with other beginner and expert investors, to use them confidently.
You should know that the ETF trades on the international stock exchanges just like most other globally traded equities, so stop nonetheless; ETFs have quite unique characteristics, which you are about to explore below.
Be Careful of Timing
As a beginner trader, you should consider placing your ETF trades between 9:40 AM and 3:40 PM ET. Compared to ET, the North American markets open ten minutes earlier at 9:30 AM and close twenty minutes later at 4 PM. You must be mindful of placing your trades between the time differences as it can potentially result in volatility and even slightly more expensive trades.
When it comes to investing in an ETF, keep in mind global events and news that can impact the trading market. Also, be mindful of central bank alerts and earnings results for the corporate sector, as these can also affect the pricing throughout the trading day.
Understand the Cost
You should know that many brokers offer ETFs without a commission. Still, it’s in your best interest to do your research and your fair share of homework before placing your trade. Most companies have a set or predefined menu of commission-free ETFs. However, they still charge a regular amount for the rest. Some ETF brokers also require a minimum purchase amount. They might let you buy an ETF for free. However, they will proceed to charge you for an ETF for selling them.
With that said, before you choose a trade, make sure you understand the pricing structure along with potentially hidden costs.
Align Your Trade with Your Goals
Like trading with individual stocks, when you trade ETFs, you must make sure that your order type is aligned with your goals. Your goals should include attaining protection against market volatility and price swings. We recommend you use “limit orders” to obtain protection.
You might also consider a “marketable limit order” if you want your order filed urgently. In case you haven’t heard of a marketable limit order before, this is a limit order that is essentially priced aggressively. In other words, the price is higher than the asking price at the time of buying, or it is lower than the selling price. Some investors recommend avoiding market orders.
