Exchange Traded Funds or ETF’s are investment funds that are designed to track the performance of other financial instruments such as bonds , market indices, stocks or commodities. Essentially, they are a collection of financial instruments that are combined together under a single fund. These assets are usually collated based on a common characteristic, such as being agricultural products or commodities. The main advantage of trading the financial markets with ETFs is the fact that the trader can trade in a few markets at the same time. Another key advantage of ETFs is the fact that the value of one asset tends to balance out the adverse price movement of another asset. Traded on the exchange just like stocks, their value fluctuates daily according to the interaction between the buyers and sellers of the ETFs.show more
ETFs are offered by brokers for all kinds of markets. Before starting to trade in ETFs, it is essential that you are familiar with the markets that you are going to trade in. You need to be able to determine when to enter the markets and exit the markets. In addition, you need to be aware of how each asset will affect the price movement of another asset. As we have mentioned earlier, this is due to the fact that ETFs normally comprise of assets that share a common characteristic. In other words, they are interlinked. By knowing the relationship of these assets intimately, it will help you to stay on top of your game.
Trading on Leverage
As a retail trader of ETFs, you will also have access to leveraged trading. With the use of leverage, you will be able to trade in larger market positions than accounts for what you actually have in your account balance. Some brokers offer a leverage ratio of as high as 20:1 for ETF trading. This is equivalent of maintaining a 5% margin on your position. For example if the value of your ETF trade is $10,000, then you are required to have at least $500 in your trading account. It should be noted that although leverage trading offers you the opportunity to multiply your profit potential several fold; it also has the potential to multiply your trading losses. In short, there is danger of you losing more than what you originally invested.
When trading the financial markets, one of the key tools that traders rely on is their price charts. With the price chart, traders can view how prices are fluctuating in a graphical manner and from there have a better sense of how prices are behaving. The same applies when trading ETFs. Nevertheless, ETF traders should be aware that the type of ETFs charts used will depend heavily on the markets that they are trading in. If the objective is for short term gains, then the ETF charts used must have short time frames. For medium term or long term investment objectives, the ETF charts used must be framed with longer time frames in order for the trader to filter out the “market noise”.