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How to Start Trading ETFs: A Guide for Beginners
The rise of the retail investor is showing itself to be one of the unintended consequences of the Covid-19 pandemic. As people were forced to stay at home, global markets provided the forum in which budding traders took their first positions. Now recognised as a trend around the world, it seems as if more would-be investors are looking to get involved. But the pressing question is where to start. Are exchange-traded funds (ETFs) the ideal first step for a new crop of traders?
What is an exchange-traded fund?
ETFs combine the diversification advantages of mutual funds with the sheer simplicity of stock market trading. It seems like a winning combination if you’re new to investing. And it’s one of the key reasons that ETFs are proving so popular. In essence, it’s like a ‘basket’ of stocks that can be traded on an exchange in much the same way as the individual stocks themselves.
The growth of ETFs has been a remarkable one over the past 10-or-so years. These funds can contain various types of investments too – not just stocks or equities. Bonds and commodities can also be incorporated into an ETF, which allows for greater exposure to various markets for those individuals who are newer to investing. And with each ETF comes different levels of risk.
ETFs vs Mutual Funds
For new retail traders, it’s tempting to conflate or confused ETFs with mutual funds. It is vital, however, to understand the key differences to ensure that your first steps into trading are the success you want them to be. In the first instance, ETFs can be traded throughout the day on an exchange. Mutual funds, on the other hand, must wait until the market closes for trading.
An ETF also comes with lower minimum investment demands – another reason why investors, particularly less experienced ones, look to them. In some instances, it may be that just a few hundred dollars is enough to invest in an ETF. That isn’t the case with mutual funds, however. And it’s another distinction that new traders must be aware of when considering their options.
It’s now possible for would-be traders to capitalise on numerous entry points into the market that simply didn’t exist previously. Taking advantage of no-deposit bonus forex opens up the global currency markets, for example. ETFs, meanwhile, do much the same for anyone who’d like to invest in their favourite listed companies or booming commodities at a lower risk.
With an increase in the number of platforms to facilitate this, investors can buy and sell ETFs when they choose too. The funds provide full exposure to markets – often at nominal risk. It doesn’t mean, however, that ETFs are risk-free investments. Volatility is still a feature of the funds, while trading costs can also eat into your returns depending on who you trade with.
Creating Your Strategy
If you decide that ETFs are the way forward as a first-time trader, the next step is to consider which funds are best for you. This could be a question of how much appetite for risk you have. Or it could come down to the time you’re willing to invest (along with your cash). But you can find there are several different strategies that might suit your interest and ambition.
You can choose to invest in the stock market via ETFs if you think the value is going to go up. An ETF can represent the entire market or a specific sector – the choice is yours. If the stock market doesn’t appeal, there are always commodities such as gold or crude oil. Or you can go further afield and gain exposure to the growth potential of emerging economies and markets.
As with all investment decisions, research is critical to making the right decisions. By thinking about your risk sentiment and strategy, you can make the informed decisions that generate a healthy return on your initial investment. But don’t be complacent. ETFs can still leave you at risk of losses if the market moves against you. And the right preparation will help avoid this.