ETF Trading: Beginner’s Ultimate Guide

Are you sceptical about getting started with ETF trading? Our ultimate guide will let you in on all ETF trading tips.

Diving into the ETF trading market can be intimidating for beginners, especially if you are planning to be an independent trader. We understand your concerns about being hesitant about it. That is why we gathered all the information you need to know about ETF trading. 

Our team hopes that at the end of this guide, you will be able to give ETF trading a try and come out successful

What is ETF Trading?

ETF trading guide

Exchange-traded funds (ETFs) are multiple stocks that are usually traded in an open market. When you hear the term single ETF, it means it’s a pool of stocks – or other assets such as commodities – probably containing between 10 to more than 500 shares of different companies.  

ETF trading is prevalent in the UK, and it has become a preferred trading method that increases traders’ profit potential. Note that when you buy a single ETF, you will have purchased shares of various companies within the traded market. 

The stock market prices fluctuate from time to time, and this also impacts how ETFs are traded. You need to carefully observe the ETF prices and purchase when the prices are low. This is so that you can sell them when the price goes up again and make profits. 

The value of an ETF will depend on the prices of stocks it carries. For example, if a single ETF hosts shares from three companies, the ETF value will increase with the increasing prices of the shares. However, if one or two companies’ shares reduce or remain constant, the value of an ETF will also be the same or reduce slightly.

Note: The value of an ETF is mainly affected by the value of the majority shares. If the company’s shares’ value changes, it affects the ETF price more compared to the one with minor shares. 

Types of ETFs

types of ETFs

There are many ways in which traders can trade ETFs. This allows you to diversify your portfolio and boost your profit potential. You do not only need to trade ETFs on stocks. Instead, you can also trade ETFs across other financial markets, which we will get into below. 

  • Commodity ETFs

Commodity trading is the buying and selling of raw products such as crude oil, gold, and agricultural products. You can trade commodity ETFs by including various commodities in a single investment. These commodities should focus on the same product group. 

Before venturing into commodity ETF trading, you need to first understand the terms attached to the commodities you want to trade. Confirm whether they allow you to own the underlying assets or if the ETF contains futures contracts. 

Understanding the commodity ETFs will allow you to figure out how to manage the risks while trading and the tax implications that come with trading commodity ETFs. 

  • Bond ETFs

Trading bonds ETFs does not involve stocks. They also do not have a maturity date or time. Bonds ETFs generate payments to investors, and the payments usually come from interests from individual bonds within the funds. 

This type of ETF trading carries lower risks which can be a good option for you to get started on ETF trading. 

  • Currency ETFs

Currency ETFs give you exposure to foreign markets, and the best thing about it compared to regular forex trading is that you will not need to worry about the hassle of currency exchanges. It is also a suitable ETF trading method that you can quickly master if you extensively analyse the markets. 

  • Sector/Industry ETFs

Industry ETFs trading is very specific on the market sectors to trade. It gives you an option to trade on particular companies such as industrial, healthcare, and technology sectors. 

It is an excellent method of ETF trading, especially with the changing business cycles. Simply figure out the businesses with outstanding performances during expansion and contraction periods and use them to your advantage. 

  • Leveraged ETFs

Leveraged ETFs are applicable on short-term investments where you invest with borrowed funds from your broker. Note that this form of ETF trading allows you to earn more profits than you could have while using your funds only. 

However, it also carries risks of losing more than you had invested. That is why we advise you to be sure of your trade before venturing into leveraged ETFs.

One of the best ways to trade leveraged ETFs in the UK is through an online CFD broker.

  • Inverse ETFs

Inverse ETFs are also referred to as short ETFs, meaning that they are also applicable in short-term trades. Their prices increase with the falling of stock markets which can be a challenging method of ETF trading, especially if you have not done extensive market analysis. 

Note: All types of ETF trading carry varying risks level, and it’s up to you to identify the one that will complement 

ETF Trading Costs

charges on ETF trading

One of the cheapest trades in the UK market is ETF trading. Note that most UK ETF brokers will not charge you trading commissions which is one way to attract brokers that are budget-conscious. However, other traders do charge ETF trading commissions, and so you need to be very keen on the charges before venturing into ETF trading. 

For example, when you choose to trade ETFs through CFDs, you will only incur spread charges. Remember that these charges are not the same on these brokers’ platforms. They all vary depending on the assets they offer and the markets available for accessibility.

That being said, it is essential to conduct your research on the ETF brokers so that you can make the best choice for your trading activities. We also recommend the best ETF brokers in the UK, so since the research might be an overwhelming process, simply refer to our referenced ones and choose the one that you can afford. 

How to Start Trading ETFs

The best way to start trading ETFs is by finding a broker that blends right in with your trading demands. You also need to be knowledgeable about how ETF trading works, which we believe you will gain after finishing with this guide. 

Additionally, make sure you have the basic strategies up your sleeve and know when to draw the gun in case you see an opportunity for profit potential. Identifying ETF trading methods will also help you specialise in a specific market and focus on benefiting from it through extensive research. 

How to Choose the Best ETF Broker

ETF brokers in the UK

Newbies often do not know how to identify the best broker for their ETF trading needs. Luckily, we are here to help. Our primary goal is to make sure you get the necessary tools to help you in your trading ventures. Having you find the right broker, which we also recommend, is what makes us do what we do passionately. 

So, let’s take a quick look at the significant factors to consider before choosing an ETF broker.

  • Security

It is essential to note that the UK market is dominated by many ETF brokers, just like any other market. Most of these brokers are not regulated in the UK market. Therefore, risking your investment funds with them will only put you at risk of being duped.

That is why to identify a legitimate ETF broker, make sure that they are regulated in the UK market. The Financial Conduct Authority (FCA) is the leading financial regulator, so this means that you should choose a broker that adheres to the conditions of FCA

Note that during this process, you will notice that some of the ETF brokers are regulated by other authorities in various jurisdictions. It shouldn’t be a determining factor as it proves the broker’s credibility even more. 

  • Market Asset Selection

ETF trading comes in different forms, and not all UK brokers offer them. You need to confirm the available asset selection in a broker’s platform through demo accounts. 

Demo accounts are usually offered free of charge so that you can use them to have a taste of what the real trading account looks like. 

Some brokers will have a diverse selection of assets more than you had planned to trade. Such brokers might just be the best option for you because it will be easier for you to try those other assets in the future whenever you feel like trying something new. 

  • Trading Platforms

As a beginner, it will suit your trading needs not to go for complex trading platforms like the advanced MetaTrader 4 and MetaTrader 5 unless you are sure of how they operate. 

Simply choose a trading platform that is easy to use and mostly a customisable feature is an added bonus. The trading platform should execute trades fast and seamlessly, especially if you are venturing into short-term trades. 

The ETF broker’s platform should have resources that support beginners in their activities. It can include research, educational, and analysis tools to help you in planning your strategy.

Lastly, the best trading platform must host the best customer support since it is the only platform to contact in case you encounter any ETF trading issues. There are various channels for communicating with customer service, including phone calls, live chats, and emails. 

Whether its availability is five or seven days a week, ensure that it matches up to your trading schedule. 

  • Commission/Spreads

As mentioned earlier, some ETF brokers will charge commissions while others spread depending on the type of ETF trading you wish to try. 

Make sure that you understand these charges regardless of your choice. The most important part of it all is that the costs should be in line with your budget for you to enjoy your experience. 

  • User recommendations

This is an essential element in your quest to find the best ETF broker. You see, users will always be honest about their experiences on a broker’s platform. With such reviews, you will understand why a broker is best for you and in which category, hence decide whether they are worth considering.

You can find user recommendations on Google Play Store, the App Store, or Trustpilot. Therefore, make sure that you visit these tools before making a choice. You do not need to go through all the comments. Simply sample a few, and from there, you will know which broker to go for. 

Risks in ETF Trading

risks in ETF trading

ETF trading is one of the activities in the UK that allows you to access multiple trading markets. With this advantage, it still carries risks, just like other trading activities. 

One of the most significant risks is when a trade does not favour you. Remember that an ETF carries various assets, so when the prices of these assets in an ETF reduce, the ETF value is affected as well, which can make you sell your trade at a loss. 

Another risk in trading ETFs is when you apply leverage. Since leverage is usually based on margin trading, the chances of you winning are increased. However, when you lose, note that it’s not just the amount you invested that you are losing but more. 

This can be a massive setback in your trading activities. 

ETF Trading Strategies

Any activity that you plan to come out victorious must have a strategy, and ETF trading is no exception. ETF trading can make you build your nest egg or drain it. However, with the right strategy, you will find yourself being an ETF frequent trader because of the profits you will be bagging at the end of it. 

So, here are the popular ETF trading strategies. 

This is a trading strategy that takes place within days or weeks, unlike day trading, which happens within minutes and hours.

Swing ETF Trading allows you to capitalise on price trends that are usually short-term. Here, you need to carefully observe the chart patterns and identify the entry and exit points.

We advise that you look for the trend with solid momentum and keep track of it. When this momentum starts to fade, whether it was upward or downwards, you might want to consider closing your open position.

This trading strategy is one of the easiest to apply in your trading activity. You can use it ideally on industry/sector ETFs to trade on the markets which are favourable during specific periods of the season.

For example, some products’ prices will rise during winter and fall when summer arrives and vice versa. Take advantage of these cycles and trade through speculating the prices during these cycles. You can refer to the previous years’ prices when applying this strategy. Just keep in mind that these prices vary over the years, so watch out.

This type of strategy can be a tricky one, and it requires technical analysis. You should be able to identify the periods when ETFs are oversold so that you can buy them and the periods when they are overbought to sell.

This strategy can be profitable with accurate analysis that lets you know when the prices of ETFs are at their highest or lowest.

Pros and Cons of ETF Trading

ETF trading guide in 2021
Pros
  • ETF trading is a great way to diversify your portfolio because of the benefits it carries.
  • It is a trading activity that allows you to trade in diverse assets across various markets.
  • You can apply leverage while trading ETFs, which can bring you lots of profits if you conduct a thorough market analysis.
  • You can easily trade ETFs on an open market.
  • Most brokers offering ETF trading do not charge commissions.
Cons
  • While ETF trading costs are low, expect management fees from most brokers.
  • The ETF fluctuating prices can be complex at times.
  • The use of leverage in trading ETFs can cost you more than your investment when you lose.

Bottom Line

ETF Trading is a great way to supplement your income. Now that you know how it works, we believe that you will make the right moves to trade successfully. Note that most ETF brokers have trading tools, so do not be hesitant to explore the research and learning tools they support you with. 

ETF can be a challenging investment mainly because of the various assets included. With the strategies above, it’s easier to figure out when to open a position and when to close. 

Remember that there are also the best ETF brokers referenced here at TradingGuide.co.uk. Therefore, consider checking them out and compare what they have to offer. You never know; there might just be a perfect broker here waiting for you to find them. 

Adam Jarfjord

is our leading content maker and head of the content department. For Adam, trading is not only a job but also a passion for more than 5 years. He has many years of experience in the financial sector and honestly admits that he is in love with his job.

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