How to Trade ETFs Without Holding the Security

An exchange traded fund is a group of investment funds, i.e., they are typically traded on major stock markets. ETFs are comparable in many ways to most mutual funds, but which are traded electronically instead of on exchanges, and which are purchased and sold during the day rather than at night on exchanges. The similarities between an ETF and a mutual fund are that they both represent a single security, usually a stock, and are usually traded on centralized exchanges, like the NASDAQ, rather than through inter-dealer venues like an exchange or futures market. However, unlike with a mutual fund, the selling and buying of ETFs are done electronically through the internet rather than through a broker-dealer.

An ETF does not have to follow the same trading rules as most actively traded funds. Mutual funds, for instance, must follow very strict rules regarding in which securities can be traded. This is due to the large amount of money that funds make and because of the large pool of capital that each investor represents. Because of these restrictions, mutual funds have been severely limited in the types of securities that they can hold. On the other hand, ETFs may follow all the same rules as well, but because ETFs trade on an inter-bank level rather than on an exchange, there are more securities to choose from. In addition, ETFs often trade on OTCBB or Pink Sheet exchanges, which have less regulation than the larger NYSE and NASDAQ exchanges.

Investors who Trade ETFs typically enjoy the flexibility of multiple trading derivatives at the same time. Because ETFs trade on automated trading platforms, rather than on exchanges, there are no restrictions on the types of trades that can be made. This means that an investor can purchase shares of a stock or index, for example, and then purchase another derivative, such as the futures contract that it represents. Because all trades are made electronically, there are no commissions to pay. Another advantage to trading ETFs is that you can create your own strategies and determine which factors influence the direction of the market and that price points you expect to set.

One of the advantages that investors may find attractive with ETFs is that they do not have to follow the same short term price guidelines as many actively traded funds. Because ETFs trade on automated trading platforms, it is possible for them to fluctuate very little in price during any one day. While some traditional day trading etfs pay large commissions to their brokers, this is not usually the case with ETFs. This means that more leverage, higher stop losses, and other strategies may be available to investors who choose to buy ETFs.

Another advantage of trading ETFs is that you do not have to hold an investment for the long term. An ETF can be bought and then held until its sale, and the gains and losses on the holding can be offset through dividends. Some people choose to purchase ETFs at as a short-term strategy and then sell them once the markets have reached a point where they need to make a profit. ETFs also allow you to diversify across many different types of investments. Since ETFs trade on major exchanges, you are able to track their performance over the course of several days or weeks to ensure that you are investing in an asset that is doing well.

Disclaimer: The analysis information is for reference only and does not constitute an investment recommendation.