ETF Trading is one of the most popular alternatives to the conventional forex trading. ETF stands for exchange traded funds. ETF Trading makes for an exciting and fast growing segment of the financial investment industry and makes for a formidable replacement to mutual funds as a preferred choice for fund managers. ETF Trading has been available since the late 80’s as they are growing at a tremendous rate as more and more financial investors are starting to be aware of the profit potential from trading ETF’s.
At the outset, an ETF Trading fund comprises of a group of stocks, bonds or other investment vehicles similar to that of a mutual fund. But there in ends the similarity. Unlike mutual funds, ETF’s trade the same way as stocks do, thus allowing an investor to buy and sell during the regular market hours. This means that investors can have access to funds immediately when selling an ETF position. Additionally, ETF trading is more cost and tax effective than mutual funds.
When trading ETF’s there is a commission that needs to be paid, which is the case with most OTC trading. There is no minimum buy requirements within ETF Trading and neither does it require a minimum holding period, which is common to most mutual funds. In fact investors can buy as low as just one share of an ETF. This makes for ETF’s to be an excellent investment vehicle when compared to mutual funds.
With ETF Trading investors can get the diversification that a fund can offer with the ability to trade in and out of the fund. This is good news because investors can virtually eliminate stock specific risks by trading a basket of stocks within the fund so that if one stock in the basket reacts negatively, the impact on a position you may have in the fund would be far less than if you owned a position in the share of that particular stock.
There are different types of funds available and in the US alone there are over 600 funds that are traded currently as more and more funds are added to the ETF trading pool.
The ETF trading portfolio includes stock sector, country, currency, commodities, bonds and other investment objective funds. Additionally there are funds that have only short positions and are sometimes referred to as ‘short‘ funds or ‘short ETFs‘ which increase in price as the short positions they hold fall in value.
Some of the ETF funds are leveraged as well. This means that when the stocks in the funds go up by a few percentage points, the overall fund could go up by a few additional percentage points and similarly if the short funds whose stocks go down in price can also pull down the leveraged amount.
ETF trading is a growing investment vehicle in international stock markets as well. A prospectus on each ETF is available and information on the individual holdings of an ETF can be found on financial portals such as Yahoo Finance. However not all ETFs are suitable for trading as they are mainly thinly traded or considered to be too volatile for a good swing trading vehicles. ETF’s in the US are created and managed by sponsor companies subject to the approval and regulation of the SEC.
ETF Trading with Securities
ETF Trading offer diversification. Lets say you feel that oil and gas stocks are a good buy but are concerned about buying just one or two companies that could face an unexpected down turn in price due to some specific company related problems.
By purchasing an oil or gas related ETF instead, investors can dramatically minimize the stock specific risks because you are purchasing a basket of stocks and not just one or two company’s stocks.