ETF trading can be tricky for beginners who do not understand how they operate. Before placing any trades with real money, traders should always ensure they have a thorough understanding of what they are doing. In this article, we will explore what ETFs are, how they can be traded, and why they are great for beginners.
What is an ETF?
An exchange-traded fund (ETF) is a type of security that tracks a basket of assets, indexes, or commodities. ETFs are traded on exchanges, like stocks, typically offering lower fees and higher liquidity than traditional mutual funds. ETFs also offer exposure to a wide variety of asset classes, which makes them an attractive option for investors who want to diversify their portfolios.
Why trade ETFs?
The ETF trading method is a technical analysis strategy that uses exchange-traded funds (ETFs) to trade the markets. The ETF trading method is based on the principle that all market movements are linked and that tracking a basket of assets, indexes, or commodities makes it possible to profit from these movements.
Why are ETFs suitable for beginners?
ETFs are suitable for beginners because it is a straightforward product with which to trade, with a variety of benefits to the product:
The ability to trade a basket of assets or benchmarks
Trading ETFs allows beginner traders to profit from the movements of various asset classes without choosing individual and single assets to invest in. This can lead to natural portfolio diversification, and it can help beginner traders reduce the risk of trading. ETFs can also track popular benchmarks, such as the S&P 500, which can easily give beginner traders exposure to the largest companies in the stock market.
Lower fees and higher liquidity
ETFs typically have lower fees than traditional mutual funds. They are also more liquid, which means that they can be bought and sold more quickly, making ETFs an attractive option for beginner investors who want to keep costs low and have the flexibility to sell their investments quickly if necessary.
Some things to keep in mind when trading ETFs
When using the ETF trading method, there are a few things that beginner traders should keep in mind and actively enforce, including, but not limited to:
Choose the right ETFs
Not all ETFs are created equal and choosing ETFs that track asset classes that you are familiar with is essential. Beginner investors may choose ETFs that track major indexes, such as the S&P 500 or the Dow Jones Industrial Average to ensure they invest in a well-rounded portfolio, but that is not a necessity, as long as they are comfortable with the asset classes they choose to trade.
Use stop-loss orders
A stop-loss order is an order to sell an asset when it reaches a specific price. Stop-loss orders can help beginner traders limit their losses and protect their capital as they can be executed immediately and automatically. This can be a great help for beginner traders who may not be able to monitor their investments as frequently as they would wish to.
Manage risk with a trading plan
When trading ETFs, it is essential to manage your risk just as you should do when you trade any other instrument. To do this, beginner traders can create and adhere to a trading plan that involves their budget, risk tolerance, asset classes they would like to trade, and when they would like to enter and exit trades. This can help them set clear boundaries for themselves, which can prevent impulsive trades guided by pure emotion, which can have disastrous consequences should the markets move against them.
ETFs are a good instrument for beginner traders because they are a straightforward way to trade the markets. Traders can trade ETFs of any asset class offered by their broker, and they can use it as a way to diversify their portfolios to reduce risk. To get started in ETF trading, they should find a reputable and reliable broker that has a vast product range including ETFs, so that they can trade their preferred instruments. A good example of this is Saxo NL, which offers competitive spreads and low commissions for traders (that varies depending on the asset class traded).