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Categorized | ETF
ETFs For Dummies
Posted on 27 July 2012.
ETFs For Dummies – Taking The Mystery Out Of ETFs
Exchange Traded Funds (ETFs) are not understood well by the general investing public. This ETFs for Dummies tutorial takes the mystery out of ETFs and explains the major risks and rewards associated with investing in ETFs. ETFs for Dummies provides a foundation for understanding ETF investing that can be utilized to further research specific ETFs for investment purposes.
The general ETFs for Dummies definition of ETFs are funds that hold a variety of assets that trade in the same manner as stocks, with constant price updates during the day that generally track the value of the underlying assets. ETFs are either broadly based or targeted to a specific investment type or market segment. A trader or investor can essentially trade and invest in ETFs in the same way as they can stocks, using limit orders, stop limit orders (to protect one’s downside risk), and short sale order (to play ETFs on the short side, when one expects them to fall in price).
ETFs can include a wide variety of different types of assets from stocks to bonds to commodity futures to hard commodity assets. ETFs can also be targeted in many different ways to invest in regions, countries, commodity types, stock sectors, amongst many others. ETFs can also be broad based and track stock market indexes that include stocks of companies in many different types of businesses.
ETFs For Dummies – Know The Risks and Rewards
An ETFs For Dummies tutorial wouldn’t be complete unless it covers the main risks associated with trading and investing in ETFs to help traders and investors to avoid the pitfalls associated with buying ETFs. The following are the main ETF risks:
- ETF prospectuses should be read carefully to understand how ETFs derive their valuations and the risks associated with holding particular ETF securities.
- Leveraged ETFs that try to capture a 200% or 300% move, based on their underlying assets, are generally not suitable for long term investment purposes. This is due their spotty track records at tracking underlying assets properly over long periods of time and the exaggerated exposure that they subject an investment portfolio to within a specific investment sector.
- ETF securities that invest in futures contracts have the risk of losing value due to price decay, if the futures contracts that are purchased over time by the ETF are more expensive than the near term ones sold by the ETF, which could cause a loss of investment principal over time regardless of the performance of the underlying assets.
Of course, there are also rewards associated with investing in ETFs, and ETFs For Dummies is going to spell them out. ETFs can be particularly rewarding if used to invest in a stock market index, as their fees are considerably less than mutual funds, which increases the potential long term investment gains. ETFs can also be particularly useful when an investor is trying to make a targeted investment, as there are ETFs for a wide variety of investment scenarios. Leveraged ETFs can be useful to traders trying to capitalize and make the most money possible from an anticipated move in a market segment.
ETFs For Dummies is just a primer to get started with ETF investing. Additional resources should be consulted before making ETF investments.
Investing is a passive thing that anonye can do and hope the markets go up and the economy improves and the system doesn’t fall apart again or another bubble doesn’t burst or the Fed doesn’t do something stupid, etc. Trading is a profession, not a hobby. It requires committment, many more resources, much more education and training and experience and resources, like any profession. But unlike any other profession, the risk is very high, especially in Forex with 100:1 leverage. You may not know what that term means, but it is a primary killer in the futures and Forex markets, even for those that think they know something. Training is very expensive.I’m not sure what you mean by stock trading being the same as Forex trading. They require different brokers and accounts. A stock is essentially part of a company with their own set of circumstances, products and services, marketing and competitive issues, employees and CEO’s. Trading the Forex is a world currency against another, called a currency pair, like GBP/USD, with their own set of world circumstances, governments, bailouts, GDP reports, interest rates, unemployment rates, etc. What Does Forex Market Mean?The market in which participants are able to buy, sell, exchange and speculate on currencies. The forex markets is made up of banks, commercial companies, central banks, investment management firms, hedge funds, and retail forex brokers and investors. The currency market is considered to be the largest financial market in the world, processing trillions of dollars worth of transactions each day. Investopedia explains Forex MarketThe foreign exchange markets isn’t dominated by a single market exchange, but involves a global network of computers and brokers from around the world. Central banks use their massive buying and selling capabilities to alter exchange rates through their open market activities and in many cases will do so not with profit in mind, but rather for any number of policy reasons. Forex brokers act as market makers as well, and may post bid and ask prices for a currency pair that differs from the most competitive bid in the market.
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