Table of Contents
Introduction to What are ETFs?
For beginners who are looking forward to entering the stock market and trading, exchange-traded funds, also known as ETFs, serve as a good option due to their array of advantages. Here are some of the best strategies to employ if you are a beginner to ETF investing.
ETFs are securities that track an underlying index or sector, providing diversified exposure with lower risk than individual stocks. Also, it has a low investment threshold compared to mutual funds. So you don’t need a large sum of money to invest in ETF.
The first step to begin ETF investment is to open a brokerage account. Nowadays, many brokers provides commission-free trading of stocks and ETFs, which makes it simple and inexpensive for new investors to begin their journey in ETFs.
Strategies
- Dollar-Cost Averaging
Dollar-cost averaging is a popular method that entails fixed-sum investments at regular intervals, despite market fluctuations. This method allows investors to build a position in the stock rather than tracking the market every second. The smart strategy of dollar-cost averaging is apt for beginners, who majorly constitute young investors who do not have much to invest at their early stage of trading. The major advantage of the application of this method is that it protects investors from market volatility and reduces risk.
Many online investment platforms offer automated dollar-cost averaging, allowing you to set up recurring purchases of ETF shares. This eases the investment process and ensures consistent contributions over time. Dollar-cost averaging is an ideal method for long-term investors seeking wealth accumulation. Consistent investments foster compounding returns and potential portfolio growth.
- Swing Trading
This strategy works when the investor uses price swings that happen in the market to their advantage by buying and selling securities within a few days to weeks, capturing price movements during upswings and downswings rather than day trading.
Swing traders focus on achieving profits from short-term price movements by buying during upward swings and selling during downward swings. This strategy gives them many advantages, like market timing, flexibility, reduced time commitment, and profit potential in trending markets. However, success comes along with skill, discipline, risk management, and continuous learning.
- Short Selling
Short selling is another strategy that involves selling stocks that are borrowed, expecting the price to fall in the future. The investor hopes to gain from the price fluctuation by buying back shares at a lower cost and returning them to the lender.
The key advantage of short selling is that investors can make profits when the price falls. Short selling enables individuals to invest in stocks that are considered overvalued and are expected to fall later. It is recommended that beginners should avoid investing in double-leveraged or triple leveraged inverse ETFs that possess high risks.
Some Key Points to Note
Beginners looking to invest should focus on passive index funds that follow well-recognised market indexes, such as the S&P 500. These offer exposure to big, established businesses and strive to perform in line with the index. A few facets to keep in mind include the ETF’s trading volume, tracking inaccuracy relative to the index, and expense ratio, which shows the yearly costs.
In order to get the knack of the process, beginners would be advised to practise using a virtual trading account before making real money investments. This would train you to some extent before entering the real market. When you feel you’re about to go, just open a brokerage account, fund it, and start buying shares of the selected ETFs.
Conclusion
ETFs offer many key benefits for beginners, such as diversification, low costs, and simplicity compared to choosing individual stocks. By building a portfolio of ETFs, beginners can get large market exposure and participate in long-term stock market growth.
