ETF Trading

To most investors, the stock exchanges are places loaded up with company stocks, often of different values and potential for growth. Some companies have unlimited potential to expand and are priced relatively lowly, making them key options for investment. Others may have reached their peak, still pulling strong, making them viable options for long-term investment and ‘blue chip’ stock holding.

This is the standard view of stock exchanges – a medium by which company stock is sold. But there is actually a second type of product traded on the world’s biggest stock exchanges. It’s not a stock in public companies, nor is it a currency investment or other type of commodity. Instead, it’s exchange traded funds – funds made up of multiple stocks and bonds that are traded similarly to public stock.

Many traders, particularly those relatively new to the industry, are largely unaware of funds traded over an exchange, known colloquially as ETFs. These funds can hold a variety of assets, including standard stock in public companies, other commodities such as currency holdings, and business or federal bonds. They can be diverse in their holdings, or decidedly narrow and more concentrated.

This versatility makes ETFs a stable investment option for many traders, particularly those looking to branch out from otherwise fluctuating stocks in public companies. As an ETF can be made up of hundreds of different companies’ stock, it can act as a diverse investment by itself. When one stock goes down in value, the others in the ETF portfolio keep the value of the investment fairly steady.

However, it’s important to remember that while ETFs are traded on stock exchanges, much like a stock in a public company, they don’t always respond to changes in the market in the same way as company stock. ETFs experience a change in price based on demand and sales activity, but often not in the same way as a high-demand of high-sale stock in a major company would.

This can be attributed to the wider mix-up of shares within an ETF – often drawing from hundreds of companies and commodities to make up the one exchange-traded fund. One similarity that ETFs do have with stock is their ability to be bought and sold without large associated fees, allowing the ETF’s trader to make quick purchases, short sales, and other margin-based actions like with stock.

Many ETFs simply track stock indexes in order to gain their relative value, holding an amount of all stocks within the index and tracking it based on overall performance. This makes them an attractive investment option for those looking to ‘hold’ their money in the market without risking it all with an individual company or stock. This is one of the primary motivators for buying an ETF investment.

Others include the tax efficiency of ETFs, which is considered one of the best investments in terms of overall tax expenses and performance. As ETFs are classified differently from mutual funds on a large range of markets, they’re not tied to the same taxation policies. While a mutual fund has to pay out on all capital gains, ETFs will only see an increase in fund value, not a capital gain payout.

This means that, in the event of an ETF rapidly gaining value without a subsequent loss, investors can ‘cash in’ on their earnings by selling the stock, and in doing so avoiding the capital gains taxes that may have been applied to the sale, should it have been a mutual fund. This allows the holders of ETFs to ‘hold’ their income in ETFs and other traded funds, avoiding excessive capital gains tax.

Another major advantage of ETFs is their ability to be ‘short sold’ like common stock, allowing an ETF holder to capitalize on poor market performance by shorting the ETF as they would a stock in public companies. Should an investor foresee a downturn in a particular market, often one that one ETF holds stock in, they could short the entire fund and make a net earning on the entire process.

Pair this with the lower fees for trading that many ETFs are subject too, particularly from discount online brokers, and you’ll find an investment opportunity that’s significantly more favorable for the short-term trader than a mutual fund or other long-term fund investment. Many brokers are willing to trade ETFs at commissions lower than $5, lowering their overall fee structure even further.

They also tend to be fairly transparent, offering a great deal of information to would-be investors, along with regular pricing adjustment throughout the day to reflect market conditions. Compared with a mutual fund, which may only see irregular pricing and value updates, an ETF is consistent for investors, allowing them to access more information about the fund than is otherwise possible.

ETFs have been available to trade since the mid-1980s, when they were introduced on most major American and British stock market trading platforms. The largest ETF at the moment, the ‘Spiders’ or SPDRs fund, has been traded since early 1993. Large ETFs such as this are considered versatile investment options for stock traders, particularly those looking for stable and steady performance.

There are currently close to one thousands ETFs operating in the United States, offering a great deal of range and versatility for investors. Despite their lower barrier to entry and relatively simple trade conditions, it’s important to treat them as you would any other investment. Study ETFs, track ETFs’ performance, and only purchase when you’re certain that any single fund will be a good investment.

Comments are closed.