ETFs, or Exchange Traded Funds, are among the newest forms of financial instruments for individual investors. They began trading in Europe and America in 1993 and 1995, respectively. The primary market was developed by American Stock Exchanges (AMEX) and the London Stock Exchange (LSE).
The simplest way to define an ETF is a cross between a unit trust and a share; they are also traded on exchanges, which is why they are called ‘Exchange Traded Funds’. These funds are targeted at tracking the performance of indices such as the FTSE 100 or the Dow Jones.
So What Makes them Different from Unit Trusts?
Well, they offer individual investors much more flexibility than unit trusts. While you do not get direct access to the fund’s assets, many ETFs provide similar benefits for a fraction of the cost. When you buy into a unit trust, your money gets pooled together with other people’s money to invest in various collective investment schemes.
Unit Trust managers usually spread risk by hedging against markets, but this means that part of your funds are invested elsewhere, which can affect performance. Funds within a unit trust may also pay commission every time they make trades which also affects performance.
ETFs avoid these problems by being traded just like shares on stock exchanges, which means that you can buy and sell them whenever you want, rather than having to wait until a set point in the month when a unit trust will allow you to withdraw or move your funds around.
What Are The Benefits of Trading with ETFs?
ETFs are traded just like shares, allowing you to buy and sell them through your broker whenever you want—allowing for much greater flexibility when making investments over unit trusts, which only pay out at the end of each month. In addition, ETFs provide almost instant access to changes in their value rather than waiting for a dividend payment every quarter.
Furthermore, they allow you to make minimal investments – as low as £10 per trade with most brokers – meaning that long-term investors can build up their funds without having to commit large amounts initially. Remember to make use of an official site when trading with ETFs.
Why Would An Individual Investor Want To Invest in ETFs?
ETFs allow investors to track performance on indices such as the Dow Jones Industrial Average and FTSE 100 while incurring fees that represent a fraction of those charged by other investment vehicles such as unit trusts.
Since their prices fluctuate throughout the day based on demand for each particular ETF, careful research can lead to opportunities that may allow for short term gains from betting on the movement of that ETF.
What Are The Risks Involved With Trading ETFs?
Since their prices fluctuate every day, there is always a chance that an individual’s investments could go down in value if they are trading on margin, which means that instead of making gains, you may lose more than you initially put in. Additionally, since share trading fees are incurred every time these funds are traded, costs can increase depending on how actively people trade them.
There has also been concern about whether or not some of the products tracking specific indices represent their underlying assets truly. That said, it is essential to note that ETFs typically carry lower risks than other financial instruments such as derivatives because they do not derive all of their value from movements in their underlying assets.
Instead, they retain most of their value from the overall net asset value of the underlying collection of stocks or bonds on which they are based.
In Conclusion
There is a lot to consider when making investment decisions, and not all investment options are equal. While ETFs can be great for those who want flexibility and low costs, investors should carefully weigh the risks before committing to them. Before you invest in ETFs, make sure that your broker provides enough liquidity to meet your needs while providing advice on the risks involved with trading ETFs over other types of financial instruments.
