Careers in Financial Trading

Focus: ETFs: An introduction to Exchange-Traded Funds

The financial markets have calmed recently, ahead of key macroeconomic decisions which are to be made by the MPC (Monetary Policy Committee) shortly. With foreign exchange and interest rates likely to be topics for discussion, investors are biding their time until they can act with greater clarity of thought.

This period of calm before a storm of financial market activity offers you a unique opportunity to review your current portfolio, as you look to optimise your returns in a constantly changing marketplace. If you are relatively new to the market too, now may be the ideal time to consider diversifying through ETFs (exchange-traded funds).

What are Exchange-traded Funds?

While ETFs have existed since the early 1990’s, a lack of knowledge prevented them from being embraced by the market until the turn of the century. While these funds may be a little more convoluted than mutual funds or simple stock market investment, however, they offer a myriad of advantages that enable you to trade flexibility, minimise risk and operate without a huge wealth of market knowledge.

If you are unfamiliar with ETF Trading, it is essentially a mutual fund that trades like a stock. Similar to a typical index fund, ETFs include a selection of stocks (and in some instances commodities) that you would usually find on the S&P 500. You then invest in a predetermined amount of shares in this fund, using limit orders to establish comfortable thresholds at which you buy and sell stocks. In this respect, you trade your fund precisely as you would with a stock portfolio, shifting shares and diversifying with relative freedom.

What are the main benefits of ETF Trading?

This is where the primary benefits of an ETF come into play, as this type of fund combines the reliability and security of a mutual fund with the flexibility and leverage of stock market trading. This type of fund also offers you access to the considerable diversity of an index fund, despite the fact that the potential returns are far higher. Most importantly, while mutual funds have a net-asset value that is fixed and calculated at the end of each trading day, the value of an ETF can fluctuate throughout any 24-hour period and this enables you to buy, sell or consolidate your way to a healthy return.

The Last Word

Ultimately, trading ETFs offer you access to the diversity of a mutual fund while empowering you to leverage the flexibility of stock options. In this respect they are unique as a financial market instrument, while they are also particularly appealing to novice traders who are unable to accurately analyse trends and select viable stocks by themselves. So rather than being prevented from trading stocks due to a lack of experience, new traders can utilise ETFs to include them in their burgeoning portfolio.

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