ETF trading is?highly popular now! ETFs were introduced some three decades back. Now you can trade ETFs on different market sectors as well as on commodities, currencies and international stocks and much more. So what are ETFs? ETFs stand for the Exchange Traded Funds.
ETFs represent an ownership stake in a basket of stocks or other underlying assets?like bonds, gold, commodities, currencies etc that might represent a stock index, a market sector like energy, oil, technology, semiconductors, travel, education, commodities, currencies?and so on. ETFs have the advantages of both the stocks as well as mutual funds.
You can trade ETFs as stocks. The price of an ETF share keeps on changing in accordance with the price change of the underlying stocks or assets.?However, ?ETFs give your diversification?just like mutual funds.?Instead of owning one stock or one asset, you now own a basket of stocks or assets in the shape of an ETF. But unlike mutual funds whose net asset value is only calculated at the end of the day and you cannot buy or sell a mutual fund share during the day, an ETF share can be sold anytime just like a stock.
The other main advantage that ETFs have over mutual funds is that they have very low fees something like 0.7% of the investment as compared to 2-4% of the usual fees that you have to pay when buying mutual fund shares. This makes ETFs highly superior to mutual funds as well as stocks. So here you have an asset that trades like a stock but has the diversification benefits of a mutual fund and very low cost as compared the mutual funds.
There are now thousands of ETFs in the market. In the past if you wanted to take advantage of oil price increase, you had to do a lot of reseach and look for a strong?oil?company stock. But now you can buy an ETF that might represent an oil index. Since you are bullish on oil prices, this ETF is your best investment on oil prices. It represents a diversified portfolio of oil stocks that would mimic some oil sector index.
You can even have leveraged ETFs. This means that if the index moves up by 1%, the ETF will move by let’s say 5%. There are currency ETFs as well that represent some basket of currencies that you might have a bullish opinion. You can also trade short ETFs also known as Inverse ETFs. If the index moves up by 1%, short ETF or the inverse ETF will move down by 1% and vice versa.
But just like any other investment or trading, first educate yourself thoroughly about ETF Trading before you delve into this great investment opportunity.