How to Make Money Trading an ETF

Exchange Traded Funds (ETFs) are collections of different stocks, often in the same sector, that are bought and sold like individual stocks. They are very similar to mutual funds but they are quick and easy to get into and out of. They are ideal for novice trading because of the limited risk spread around different companies, and how easily they can be traded.

Difficulty: Moderate

Instructions

1. First you will need to save some money that you won't be needing for awhile. The more money you save up (or add slowly), the more you can make using this technique. You will also want to have enough money to cover brokerage commissions and still make a profit. For example, if you exit a position after it grows 10%, but you only invested $100, you make ~$10 but probably lost at least $7 in commission (that's 70% of your profits)! Make the same trade with $1000 invested and you make $100 and only lose 7% to commission.

2. Buy low and sell high. We've all heard this before but this simple rule can help you make extra money by trading these funds. You do not have a huge risk of the entire fund plummeting to $0 because the risk is spread over lots of different stocks. Track the fund for awhile and get an idea of its highest and lowest price in the past year (see Step 3 for advice on which fund to choose). For your initial purchase, keep an eye on the news, the Dow, and the fund itself and wait until it goes down 5-10% from its average price. You can also keep an eye on the price as it falls, and then buy right when it starts to go up again. Then hold your fund until it goes up, at which time you can sell for a profit. You can repeat this process several times a month, week, or day as the stock price fluctuates.

3. Chose an ETF you would like to invest in. Yahoo finance, MSN Money, and your broker website typically have lots of information on ETFs and you can find out everything you ever wanted to know about a particular fund. Take a look at the fund's chart to get an idea of how the price has fluctuated over the past few months. Even though past performance is not indicative of what the market will do it the future, it can be helpful to look at the ranges of prices that a particular fund has been in. One easy type of ETF to get started with is the kind that mimic the overall market, the Dow, or the S&P 500. You can expect these to go up with the market goes up or go down when the market falls. An interesting spin on these are also funds that are created to do just the opposite of the market.

4. Here is an example from my own experience. Purchase 100 shares of SPY, the S&P 500 mimicking ETF, at $89 per share and sell at $100.7 three weeks later. Profit, $1170. Purchase again a few weeks later at $77 and sell at $82, profit ~$500. Purchase the next day at $83 and sell two weeks later at $89, profit $600. So basically over a little less than three months the profit, minus commissions, was over $2000 on an investment of a little less than $10,000.

Tips & Warnings

• Don't wait for the fund to get to its all time high before you sell. You just want it to go up relative to your purchase. It is impossible to time the market perfectly but fairly easy to sell on an upswing.
• Don't fret if you sold and the price keeps going up. This will probably happen at one point but just be happy the market in general is going up and your other stocks are too!
• Similarly, resist the urge to sell if you bought and the price keeps going down. The market almost always goes up in the long run. You can even set a "good til cancel" order at $1 over your purchase price and wait it out.
• Try to find an ETF that pays a dividend. If you hold it over the period when it pays the dividend you can make even more money!
• This is not a sophisticated technique and I am no investment professional or expert. I have found it works for me and it's even kind of fun. I'm sure there are plenty of better ways to make money in the stock market but this has been easy for me to learn and has been relatively low risk.
• DO NOT invest money in the stock market that you need in the short term.

[BSMartin]

on 12/13/2009 Good to know. 5*