How to Trade ETFs

Exchange-traded funds (ETFs) are unique securities that have traits of both index funds and regular stocks. Like stocks, ETFs can be bought and sold at any time during normal trading hours. However, ETFs track a group of stocks, often in a certain industry or country.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Stockbroker

1. Set up an account with a stockbroker or investment management company. If you already trade stocks, mutual funds or other securities, you should be able to trade ETFs with that same broker. Be sure to discuss your broker's client history, experience and your own investment plans before you commit to one broker or company.

2. Research ETFs that you think will be a good investment and discuss them with your broker. He will likely suggest a variety of ETFs to you, and you'll need to make your decision based on factors like short- and long-term financial goals. Check the business section of major media websites to find out how various ETFs and foreign markets are performing.

3. Set up the parameters for your investment plan. Unlike index funds, you can place certain restraints on your ETF investments. For example, you can place an order to sell certain ETF funds if their value drops below a certain amount at any time during the trading day.

4. Place your order with your broker. Often the trading process is done over the telephone, but some financial software allows you to trade ETFs electronically. Remember to place exact orders for the ETFs you want to trade to minimize broker commission fees.

5. Meet regularly with your stockbroker to discuss the performance of your ETFs and your investment goals. You should also download the annual and semiannual reports from the issuers of ETFs. These reports can give you important information about the performance and earnings of a potential trade.

Tips & Warnings

• Put a maximum of 10 percent of your investment money in any single ETF. This limit protects the value of your investment portfolio should one of your securities drop significantly in value.
• You can often get a sense of how well an ETF will perform by looking at its corresponding index fund.
• Some ETF traders recommend that you set up an automatic order to sell any ETFs that lose more than 5 to 10 percent of their value during the day.
• Trading ETFs isn't free. Some securities, like mutual funds, can be traded freely, but you'll have to pay a transaction commission to your broker when you buy or sell ETFs.

[lonniel]

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